REIT reform disappoints developers

Gordon Brown’s much vaunted real estate investment trust (REIT) initiative
could fail to attract property companies in the numbers hoped for, despite the
reforms announced in the Budget.

Disclosing the amendments to the original REITs regime, announced in the 2005
pre-Budget report, the government revealed that it would relax restrictions on
gearing levels and adopt a more flexible approach to REIT ownership rules.

But question marks remain over whether the changes go far enough to make
REITs attractive to property developers.

Gareth Lewis, a spokesman for the British Property Federation, said the
changes were an improvement but added that it remained to be seen whether
property companies would change to REITs.

There were also doubts over whether the new interest cover rules, which
effectively doubled the allowable gearing levels for REITs to 65%, would be
attractive enough for blue chip property groups, which typically gear up by as
much as 90%.

‘The UK REITs regime is not quite as attractive as those in the US and
Australia,’ said Jeff Webber, an associate director at tax consultancy Chiltern.

Stephen Herring, tax partner at BDO Stoy Hayward, said the proposed
conversion charge rules risked discriminating against recent property purchases.

‘I am somewhat surprised that the proposed conversion charge will be applied
on the gross assets of the company converting to a UK REIT rather than on its
notional capital gains,’ Herring said.

He added: ‘This discriminates against recent property acquisitions which
might not have appreciated in value in favour of assets held for many years.’

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