The UK Chancellor of the Exchequer Gordon Brown has made it easier for companies to convert into real estate investment trusts (REITS) when the corporate structure is introduced for the first time in Britain starting on January 1, 2007.
In his Pre-Budget report—most likely his last before replacing Tony Blair as the head of the Labour party—Brown relaxed two important rules.
The first is that companies will no longer have to be public before applying for REIT status. The second is that they will no longer need to have at least 75 percent of their business consisting of property rental income in order to covert. This second change is designed to make it easier for newly established companies to become a REIT.
The new 75 percent rule states that companies only need to meet the condition within one year of entry. A 2 percent conversion charge, measured as 2 percent of the value of properties held at entry, will be levied at the end of this first year on the value of properties held at that time.
Stephen Herring, a tax partner at accounting firm BDO Stoy Hayward, said the application process is likely to become far simpler.
“The relaxation of the business balance rules acknowledge the difficulty that a new fund might have in purchasing a property portfolio on or around the conversion date,” he said.
The earliest companies to become REITS are set to be existing public property companies such as Brixton, Big Yellow, British Land, Great Portland Estates, Hammerson, Land Securities and Liberty, all of which have said they plan to convert. However, experts say private equity real estate firms may be among the next wave to take advantage of the regime because they may view REITS as an exit route from their property investments.