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The guide to investing in Real Estate Investment Trusts in the United Kingdom

Listed Property Companies Likely to become UK-Real Estate Investment Trusts

Hammerson is the UKs fourth largest property company and the first FTSE 100 property company to announce that it will convert to Real Estate Investment Trust status in January next year when the legislative framework is in place. Hammerson, which is best identified by its part ownership of the Brent Cross Shopping Centre and its development of the Bull Ring in Birmingham, has over £4 billion of UK assets including both retail shopping malls and office accommodation. It has accrued some £365 million of differed tax provision on that portfolio but will have to pay only 2% of the asset value for property converting to REIT status. The 2% payment will cost some £80million but the first installment of that money does not need to be paid until July 2007. The elimination of the tax liability will result in an immediate 8% gain in shareholders equity. Hammerson chairman John Nelson told investors the switch into a Reit 'will provide additional opportunities to grow the business over the next few years.' He also highlighted that surpluses from its development programme would be tax exempt provided developed properties are retained for three years, adding that investors would be investing in Hammerson on the basis that their investment is taxed only once, rather than twice. Hammerson was also the first UK property firm to convert part of its portfolio into a similar REIT type scheme in France in 2004.

Associated British Ports is also considering putting its property assets into a Real Estate investment Trust. ABP owns 21 traditional general cargo ports around the country, including Southampton, Hull and Port Talbot and is under threat from a takeover from a Goldman Sachs led consortium. Whether its under the current board or under the Goldman Sachs team the opportunity to release value under a REIT tax regime will be too lucrative to ignore. Similarly the Price Waterhouse Coopers corporate finance team who are running the sale of Bizspace, the workspace provider, are looking at splitting the company in two to benefit from the REIT legislation. The REIT would hold the assets while a second company would run the operation.

Amongst the smaller property companies both Terrance Hill and Hallendale have said that they are investigating the benefits of conversion to REIT status. REITs will have an effective minimum size of around £100 million and its interesting to note that property companies such as these, which barely reach that minimum threshold, are examining the options. The managing director at Terrace Hill, confirmed his commitment to the REIT status to the Glasgow Sunday Herald: “The tax transparency of the new vehicles will mean that property investment companies which do not convert will be instantly disadvantaged by double taxation charges,” he said. “It makes one wonder whether non- converted companies will survive as quoted vehicles.

Property Analysts are now examining which other property companies will do best when converting to UK-REITs. The stock market currently values property companies based on the growth in their net asset values. This encourages companies to become highly geared property development vehicles with an indifference to the efficiency of the rental operation. REITs will change that.

Analysts agree that Slough Estates and Land Securities are the best equipped for conversion to REITs. Both have low debts, below 50% gearing in the case of Land Securities, and both already pay out more than 70% of their current income. Analysts will get used to treating rental growth rather than capital asset appreciation as the measure of a REITs management. Here Slough estates has a relatively poor expectation of single digit rental growth over the next 3 years while Land Securities expects rental growth close to 25% over that period. On the other hand, if we look to how valuations are assessed in the US, Slough is a sharply focused upon a single asset class, industrial property, while Land Securities is unfocused. In the US higher ratings are given to REITs which are focused on an individual property class.