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In March this year the UK moved a step closer to the introduction of a version of US Real Estate Investment Trusts (REITs), with the announcement by Chancellor of the Exchequer, Gordon Brown, in his annual budget speech, that the government was launching a consultation on the most appropriate structure for the so-called Property Investment Fund (PIF).
The review, said Brown, 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’, will consider how the legal and tax elements of a new PIF could be structured.
Action by the UK government on PIFs began in April 2003, when 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.”
This was a point the industry had been arguing for some years. A pre-budget statement by the British Property Federation (BPF) pointed out 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 did not exist at present.
John Gellatly, director of investment banking at Credit Suisse First Boston in London and a prime mover in the presentation of a case for UK REITS (PIFs) to the Treasury, notes that the dialogue announcement by government came as a “bolt from the blue”. He says: “For 20 years the real estate industry had the door slammed in its face on the proposal for UK REITS.”
In part, however, he acknowledges that the UK property industry itself needed to grow to meet the challenge, noting that the efforts of the Investment Property Forum (IPF), British Property Federation (BPF) and the Royal Institute of Chartered Surveyors (RICS) in presenting a unified front on PIFs had certainly solidified the cause.
Gellatly’s own involvement with UK PIFs came about through what he calls ‘the gang of six’, a group of high-profile real estate professionals from the three organisations who were looking for someone with an analyst background to help formalise proposals to the Treasury. The gang of six includes Stephen Palmer, principal of Seven Dials Consulting, Ian Marcus chair of the IPF, Nicholas Ritblat, director of British Land, Liz Peace, chief executive of the BPF, David Hunter, CEO at Aberdeen Property Investors and Stuart Beevor, group fund management director at Grosvenor.
In response to initial government noises in the summer of 2003 about the potential economic boost of such a property vehicle, the group carried out secondary market research looking at what was already available and presented its research to the Treasury in September last year.
Gellatly says the case focused on a UK REIT style vehicle as an economic boost both for consumer involvement in property as well as a facilitator for UK plc in terms of cost of lets and infrastructure.
“The Treasury had also visited the Netherlands and the US and taken stock of the scene.
“There were some suggestions from the government that REITS might just be a residential thing, but we argued to extend this to regeneration and infrastructure projects, except for hospitals or anything like that.”
On the consultation process, Gellatly believes that the government document is well written and “extremely readable”.
“There is indication that the government would like to move forward on this.
“There has been some criticism from investment analysts that the proposed legislation doesn’t go far enough, but I think this is unwarranted, especially when you look where we were three years ago.”
The ‘gang of six’ are currently preparing a response to the government paper and have created a number of focus groups to look at issues such as gearing, development, management and testing.
“We need to define the elephant, so to speak. We know that it is big and grey, but what actual features does it have?
“We are also trying to ensure that we are on the same wavelength as the Treasury to ensure that we are not miles from their thinking.”
Looking ahead, one area where Gellatly says he would like to talk further with the Treasury is the possibility that London could become a central hub for the European real industry on the back of a liberal regime for PIFs: “If you could enable the Luxembourg vehicles to convert to London and then bring the offshore vehicles back onshore then I think London could be set up as the centre for financial excellence in real estate because the market here is very broad and deep already.”
For now though, Gellatly is urging the real estate industry at large, as well as the various pension, insurance and asset management associations, to send in their own responses to the PIF consultation document, which he believes the government could respond to in its pre-budget report in November/December this year.
“We need the Treasury to see that the UK real estate industry is passionate about this issue!”
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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