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LONDON-In news that has been broadly welcomed by the industry, the government will legislate for REITs this year by including new laws in the 2006 Finance Bill. In addition to the legislation, the government has set the conversion rate and doubled the borrowing thresholds.
"To attract more capital into house building, we will legislate to introduce for Britain real estate investment trusts that are so successful in the USA," Chancellor Gordon Brown said. However, he cut the interest cover that will be allowed on the capital invested in a REIT to 1.25% and this is expected to affect the debt that can be used to fund them.
Head of property at Credit Suisse Glenn Newson said that Brown "has come as far as expected by the property industry" in his key proposals for the introduction of REITs. "Most people will actually be pleased that at long last he has given the green light to REITs." But he expressed some disappointment at the rules on gearing. "The ultimate wish list was that he would not legislate at all on the level of gearing."
A statement by Royal Institute of Chartered Surveyors welcomes the news that REITs will be introduced in January 2007. "These investment vehicles should help the government achieve their aim of improving the efficiency of both the commercial and residential property investment markets and open them to individual investors."
It goes on to say that the "government has listened to industry concerns regarding restrictions on gearing, effectively doubling the borrowing thresholds. Also, basing the conversion charge at 2% of total gross asset values will mean a lower tax charge than a model based upon capital gains. These welcome amendments should facilitate an easier transition to REIT status for many listed property companies."
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