The UK government’s decision to introduce a new regime for investment in the UK via a ‘private’ Real Estate Investment Trust (REIT) looks set to pay off as US companies with billions of dollars under management take steps to set them up.
Since 1 April 2022, one or more institutional investors have been able to establish a private tax-efficient REIT, whose shares do not have to be admitted to trading on a stock exchange.
The UK government paved the way to the new structure by making changes to the existing REIT ownership rules relating to 10% corporate shareholders in a REIT, known as holders of excessive rights.
The first example was created on the very first day of the new regime by UK company LandSec and M&G Real Estate which launched a 25% stake in Bluewater shopping centre.
But sources say a number of US REITs – which tend to be sector specialists – are following in those steps. In one instance, a US REIT consolidating holdings has notified the UK tax office, HMRC, and expects to ‘elect in’ before the end of the year. In another, a US REIT is creating a private UK REIT as a vehicle to make UK investments.
Private UK REITs could further take off given sovereign wealth funds are also looking into the structure. This comes in response to proposed changes in a government consultation paper that sovereigns investing in UK immovable property will be taxed directly from April 2024.
Further, experts say clubs of large international institutional investors such as pension funds might avail themselves of the new private REIT structure as an option.
Elliot Weston, partner and REIT expert at law firm Hogan Lovells, who advised LandSec and M&G on the UK’s first private REIT, published a paper on Monday on the subject.
He said: ‘I think there will be more UK private REITs being created.’
His paper explains the attractions, including how a REIT could acquire a company that owns UK property without triggering a chargeable tax gain.
A private REIT could also sell a UK property and re-cycle the proceeds to invest in other UK property without gains tax. Further, a REIT could dispose of shares in a UK property-rich company and be exempt from UK corporation tax on any gain.
Lastly, a buyer could buy a company owning UK property from a private REIT without any contingent gain provided the company does not dispose of the property for at least 2 years.