The highly successful recent launch of Custodian REIT plc should signal a sea change in the perception of REITs as a vehicle for property investment within the UK.
Custodian REIT, for whom DWF LLP acted, listed on the Main Market of the London Stock Exchange and acquired an initial seed portfolio of 48 properties valued at £95m, comprising a diversified blend of property sectors. The IPO was significantly oversubscribed, highlighting the strong appetite for UK property from investors, and raised a war chest of £55m of new funds to take advantage of buying opportunities in the UK property market.
This gives Custodian REIT significant firepower and flexibility in the market at a time when access to capital remains constrained.
There remains a widely held misapprehension that REIT status is only viable for the “big boys” such as British Land and Hammerson. That isn’t the case – becoming a REIT is relatively straightforward and the barriers of entry to the REIT regime were significantly eased by legislation changes in 2012.
REITs are a globally recognised brand. They have been in existence in the US since the 1960s even though the UK REIT regime was only created in 2007. There are investment funds worldwide with specific mandates to invest in REITs. Since the UK property investment market remains attractive to overseas investors, the creation or conversion of a property investment vehicle with REIT status will enhance opportunities to tap into this source of finance.
Sector specific or niche focused REITs have the potential to be popular with investors offering indirect investment into property via an easily tradable investment asset (i.e. shares).
Since August 2012, a number of sector specific REITs have been created recognising the potential appetite amongst investors. These include:
1. Tritax Big Box (logistics facilities)
2. Ground Rents Income Fund plc (ground rents)
3. Safestore Holdings plc (self-storage)
4. Assura Properties plc (healthcare)
5. GCP Student Living (student accommodation)
Who might benefit from the post 2012 REIT regime?
1. Unregulated Collective Investment Schemes needing to restructure due to legislation changes
2. Property rich entities could consider spinning their property assets into a REIT by way of sale and leaseback
3. Banks / other debt providers looking for an exit strategy for large property portfolios on their books
4. Smaller propcos/ family-owned propcos looking to exit
The following principles apply to a REIT:
1. It is an ordinary company (despite the name “trust”) whose shares are listed on a recognised stock exchange - this now includes AIM
2. It must have a property rental business constituting a portfolio of at least 3 properties or separately rented units (not owner occupied)
3. No single property can exceed 40% of the total value of the portfolio
4. At least 90% of the property rental income profits must be distributed to investors each year
5. Exemption from UK corporation tax on profits and gains (taxed in hands of shareholder rather than in hands of the REIT)
The REIT regime within the UK hasn’t proved so far to be as popular as originally anticipated. It was launched in January 2007 and immediately saw many of the UK’s largest listed property companies convert to REIT status. However, the attractiveness of the UK REIT regime until recently, has remained blighted by the property crash and global economic crisis of the last 4-5 years.
In light of the upturn of the UK property market, REIT status deserves a fresh look.