Property experts say the Government’s upcoming consultation on changes to the tax treatment of real estate investment trusts could result in expansion of the Reit market.
The Treasury’s Budget statement, published last week, says the Government will consult this year on changes to the tax treatment of income received by a Reit when it invests in another Reit. It will also consider the creation of social housing Reits.
To qualify as a Reit, 75 per cent of a trust’s income and assets must be tax-exempt property rental business. Currently, a Reit is not allowed to treat income from an investment in another Reit as tax-exempt.
Deloitte real estate tax partner Phil Nicklin believes these rules should be relaxed. He says: “The current rules discourage general Reits from setting up a specialist Reit, such as a shopping centre or residential Reit, and relaxation of the rules would reverse this.
“By setting up specialist Reits, general Reits can raise capital by issuing shares to investors that are looking for specialist Reit exposure.”
PricewaterhouseCoopers tax partner Ros Rowe says changes in the tax rules would bring Reits in line with property-authorised investment funds – the unlisted open-ended equivalent of a Reit.
She says: “Paifs can invest in Reits and the income distribution is tax-exempt. This would be a levelling of the playing field between Paifs and Reits and would encourage Reits to invest in other Reits.
“This could benefit the smaller Reits that want exposure to the investments that some of the bigger ones have.
“If a smaller Reit is sitting on some cash that it wants to invest and cannot get access to large physical property, a sensible move is to buy a few shares in a Reit that has access to this property.”
Rowe says this is a liquid way to invest in the property market, as shares can be bought and sold as they are needed.
Atkinson Bolton Consulting director Simon Gibson agrees that if the tax rules are relaxed more Reits are likely to launch, which would improve the liquidity of the property market.
He says the firm has been reluctant to use Reits recently as they are highly correlated to the stockmarket and do not offer the same diversification benefits of other property investments.
Gibson welcomes the Treasury’s announcement that it is considering launching social housing Reits. If social housing associations can covert to Reit status, it would spare them from having to pay any corporation or capital gains tax on the profits made from property investments.
He says: “If social housing associations can covert to Reit status it will encourage more social housing to be created through savings made by the tax benefits of Reits.”
Nicklin believes the creation of social housing Reits would ultimately benefit investors.
He says: “Social housing Reits would give retail investors more choice, as currently they cannot access that asset class. There is definitely opportunity there as housing associations are huge in terms of the amount of properties they have.”