UK - Changes announced this week will make it easier for pension funds to invest in UK REITs by lifting the de facto cap on institutional shareholdings.

Under the current rules, a property company could lose its REIT status if a pension fund or other institutional investor owns a major stake in it. 

The new rules - expected to come into force next July - will allow pension funds and insurers not only to buy REITs but also to set up their own.

Phil Nicklin, real estate tax partner at Deloitte, cited a club of unnamed local authority pension schemes that had explored setting up a REIT to target assets in a particular sector. 

Whereas the old rules blocked the move, the new rules would allow it.
"Large overseas pension funds could now use a REIT as a UK property investment

platform," he said.

Driving the REIT regime changes is the UK coalition government's desire to incentivise institutional investment in the UK residential sector.

Ernst & Young partner Russell Gardner said a relatively small number of listed property companies would convert compared with a relatively higher number of new entrants - including those active in residential.

However, Evolution Securities real estate analyst Mike Bessell was sceptical that property companies would rush to join the £24bn (€28bn) UK REIT market. 

Although he said a few might convert - including storage firm Safestore - he added:

"The bulk of UK listed companies that would gain from becoming a REIT have already converted."

Instead, pension funds and banks could use the revised structure to parcel up assets and bring them to market - a move reminiscent of the Australian REITs regime, which grew out of government measures to allow banks to list their problem property portfolios.

"It provides a mechanism for it to happen that wasn't there before, and that can only be positive," said Bessell. 

"Pension fund portfolios of prime assets will be well received, but they will have difficulty with secondary and undermanaged assets.

"I can't see that it will solve the banks' problems because the equity market won't want to pay what banks think the assets are worth."

Gardner said the UK Treasury had missed an opportunity to expand the potential universe of REIT investors by omitting some categories from the list of those defined as institutional investors - although the Treasury has indicated it is willing to reconsider which investors count as institutional. 

Despite disappointment over definitions, Gardner described the changes as "directionally positive" - though he doubted that changes would be sufficient to offset a growth-negative economic environment.

"Can any policy ever be dramatic enough to counter the economic environment?" he said. "When the changes are implemented next summer, we might just find the macro environment will overwhelm them."

The changes announced this week also included the abolition of the conversion charge, currently at 2%, on the market value of the property assets, and permission for property companies listed on the less stringent Alternative Investment Market and PLUS to register as REITs. 

"We'd like these changes to be a step forward, not the end of the story - and I hope we'll end up with a REIT regime as good as those in the US and Australia," said Gardner.

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