F&C queries Reit rules and suitability

With Parliament about to debate rules governing real estate investment trusts (Reits) as part of the Finance Act 2006, F&C has issued a call to include further rule changes to ensure a wider spread of Reit vehicles.

Current proposals mean establishing a Reits market presence is really only open to already existing, larger property companies with large shareholder bases.

Paul Herrington, head of UK property investment at F&C, says the rules mean new entrants will find it hard to establish themselves, bearing in mind conversion costs, gearing restrictions and the requirement for income distribution.

Together, the rules would make it difficult for Aim-listed property companies to convert - as Aim is not a recognised market for purposes of the legislation - while existing property unit trusts would find it impossible to convert, as would limited partnership structures.

The latter is a point echoed by others in the industry, such as Michael Patrick, business development director at Legal & General Property.

He too has highlighed the issue of what to do about rules restricting conversion of unit trusts, including the 10% shareholder limit rule, which effectively stops institutions from acquiring more than 10% in a Reit.

This would make it difficult for totally new vehicles to establish themselves in the market, as they would likely have to seek funding through an IPO, while limiting the amount that could be sold to any one institutional investor.

Herrington says on this point that not only would such a vehicle not be able to acquire Reit status until after it had floated, but it would not even be able to acquire property until it had gone through these hoops.

"If UK legislators do not widen Reits investment criteria then investors will have to consider other property investment options, particularly if they want to track the direct property market as closely as possible. Reits may therefore appeal to some investors but not necessarily to all,” Herrington says.

Patrick has said that if the relevant legislation is not put in place, then unit trust managers may well think it not worth their while trying to convert, especially where the government fails to implement some sort of “grandfathering” to enable shareholders with greater than 10% holdings in such vehicles to not suffer a tax disadvantage as the rules currently would apply if conversion were to proceed.

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