Plans to relax investment trust rules open door for housing associations
REITs offer a new investment option
A government move to relax property investment rules could see housing associations pool their stock to create a new private rental market.
The results of a Treasury consultation on real estate investment trusts - or REITs - was announced last week. The proposals ease regulations that were previously seen as a barrier for social landlords to enter the market.
The changes, to be outlined in full in the draft Finance Bill on 6 December, open up the possibility of new institutional equity investors (pension and life funds) ploughing cash into tax-efficient listed companies set up by housing associations.
Associations could club together to set up REITs into which they could move properties off their balance sheets and then benefit from a new source of investment.
‘This is a dramatic departure,’ said James Duncan, a corporate partner at law firm Winckworth Sherwood. ‘From a housing association point of view, they’ve never been that interested because the main benefit was that REITs were tax exempt, which they [housing associations] were anyway.
But housing associations can now work their balance sheet a lot harder [by taking properties off balance sheets and into a more liquid REIT] while having the same tax-exempt status.’
Among the changes proposed by the Treasury are the scrapping of a conversion charge of 2 per cent of the assets for setting up a REIT, along with stamp duty on property of up to 4 per cent and the abolition of rules governing which stock exchanges the companies could be listed on.
The reforms could mean landlords - either individually or collectively - can set aside property, most likely earmarked for the private rented sector, because of the level of return for investors for a standalone REIT.
Those properties can be used to leverage more investment than if they were sitting on an association’s own balance sheet.
Places for People is considering converting some of its property into a REIT, but other landlords gave the proposals a lukewarm reception.
Rod Cahill, chief executive of 15,000-home Catalyst Housing Group said: ‘We are looking at it, but we’re still pretty sceptical as ultimately the problem is that the returns are simply not enough to attract investors [as private rented sector returns are typically lower than major investors want].’
Richard Parker, head of housing finance at Pricewaterhouse Coopers, said landlords would be wary of launching REITs alone and would be more likely to group properties together.
REITs : what are the options?
There are several ways in which housing associations could take advantage of new REIT legislation. They could:
- launch a standalone REIT on the stock market to seek new external investment
- put housing stock into a REIT but retain all shares in the company
- launch a REIT in conjunction with other landlords to spread risk