UK REITs' 'muted' reception
Reaction to the government’s outline real estate investment trust proposals published just before Christmas has been muted – with many industry specialists adopting a wait-and-see approach.
Gareth Lewis, director of finance and investment at the British Property Federation (BPF), said: “We’re not rushing out and making huge, sweeping statements about our views because it’s clear that there are many areas that are going to need further consultation.”
The BPF has been leading the industry’s liaison with UK Treasury officials on the REIT issue for the last two years.
The two main surprises concerned interest restrictions to prevent irrational exuberance on the borrowing front and a rule that no shareholder should hold more than 10% of a UK REIT.
The main disappointment was that the government made no clarification on the cost of converting to a REIT or even on the mechanism for calculating the cost.
Speaking about the interest cover ratio of 2.5 (profits plus financing costs, divided by financing costs) Lewis said: “My feeling is that the limit on effective gearing (which translates to about 70%) is too demanding and it would be a problem for many companies if it stays that way.
“It would be a major factor in the decision of whether companies convert to REIT status.”
Merrill Lynch analyst Robert Fowlds pointed out that that many UK stock exchange listed property companies including British Land, Helical and UNITE had gearing of over 100%.
He also pointed to the minimum of three assets that each REIT must hold with no single asset accounting for more than 40% of the portfolio.
He concluded that on this basis: “There will be no Meadowhall Sheffield Shopping_Centre REIT but perhaps Broadgate [City of London office_development] with its 14 phases will be allowed?”
Lewis said the 10% maximum holding in a REIT was equally surprising and he’s not sure what is behind the government’s thinking on this. “If it were to stay in the proposals in its current form, it would mean that many entities would not be able to convert.
“If you looked at the ownership structures of the firms involved in current property transactions you can see that a 10% rule would be a big issue.
“What we need to do is understand why the government has put in this restriction and see if we can work around it. At the moment it would affect, for example, a pension fund holding 10% in a property company which is quite a common arrangement.
“It also begs the question of what would happen in a takeover situation. These are the issues that we’ll be working through with the Treasury over the next couple of months.”