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Budget Special - UK moves towards introduction of REIT structure

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UK Budget Special - The UK moved a step closer to the introduction of a version of US Real Estate Investment Trusts (REITs), with the announcement today by Chancellor of the Exchequer, Gordon Brown, that the government was launching a consultation on the most appropriate structure for the so-called Property Investment Fund (PIF).

The review, said Brown in his annual budget speech, would also examine the taxation of related property investment products as well as the introduction of legislation to facilitate the removal of tax barriers to the development of a market in property based derivatives.

The government said the aim of the consultation was to encourage more efficient and flexible investment in property by both institutional and retail investors.

The consultation, entitled: “Promoting more flexible investment in property” considers how the legal and tax elements of a new Property Investment Fund could be structured.

In April 2003, the Chancellor asked Kate Barker, a member of the Bank of England’s Monetary Policy Committee to undertake a review of the UK property market. Barker’s interim report stated: “there is merit in the government considering a vehicle, based on the US Real Estate Investment Trust model, to encourage increased institutional investment.”

A pre-budget statement by the British Property Federation (BPF) argued that for institutional investors, concerns about liquidity, high transaction costs and the size of investment required were all reasons for the low percentage of pension and insurance funds’ assets allocated to property.

The introduction of a REIT style UK product, said the BPF, would enable investors to broaden their investment portfolio, diversify risk, get a mixture of steady income with some capital appreciation and access greater liquidity - since investors would be able to trade units of a REIT rather than having to trade specific properties. The BPF added that REITs perform more like a direct investment in property rather than property company shares; and provide a ready-made diversified portfolio of properties, rather than requiring investors to put all of their investment into a single property.

The federation also pointed out that the UK was the only G7 country where REIT-type products do not exist at present.

The deadline for consultation responses is 16 July 2004 and they should be sent to: PIFconsultation@hm-treasury.gsi.gov.uk



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