The government has finally introduced REITs to the UK and many property players are looking to capitalise on the tax breaks they offer.

For players in the UK property investment industry, perseverance is an essential quality. For example, it took some 20 years of lobbying various government administrations before finally in 2005 Chancellor Gordon Brown announced that the UK would introduce its own real estate investment trust (REIT) structure.

For decades, property investors overseas enjoyed the benefits of a REIT â“ a corporate vehicle that allows speculators to invest in property without having to buy it outright and garner tax breaks in the process [see box] â“ while those in the UK had always been denied it.

So it was no surprise when the UK REIT was introduced on January 1 this year that many existing quoted property investment firms, such as British Land and Great Portland Estates, instantly converted their status to REITs. Many others have also looked at converting to REIT status or setting up a new fund to take advantage of the tax breaks on offer.

Long gestation

For example, the Channel Islands Stock Exchange has received “significant interest” from potential REITs about listing on the market in the past few months, according to Tamara Menteshvili, chief executive of the CISX. “The CISX has had a lot of enquiries about the listing process from companies thinking about forming a REIT,” she says.

But at the time of writing no newly-formed UK REITs have listed on the CISX. “We are in April, so REITs have been around for a few months and people have been thinking about it for a long time and from our own experience in the level of enquiries about our listing rules, there are going to be some applications going forward,” Menteshvili says.

She expects the first applications to come in the next three months as REITs come to the end of the formation process. Menteshvili: “A precursor to listing is to get the REIT constructed and that has a longer gestation period [than converting an existing fund] because the company is new. There are a lot of things to consider and so there is not going to be any great rush to be the first to join, but it is only a question of time.”

Established niche

The CISX has proved popular with potential REITs because they have to be listed on a recognised stock exchange. With AIM and PLUS ruled out by this requirement, the London Stock Exchange is the other obvious choice for listing a REIT, but some may baulk at the high costs of listing and ongoing corporate governance. However, the CISX has a more straightforward and cheaper listing process, although Menteshvili is quick to add that it also has listing rules of a standard “which you would find on any other mainland exchange”.

A UK REIT can also be domiciled in the Channel Islands as long as it is a tax resident in the UK.

Another advantage of the CISX for REITs is its established niche in listing property funds.

Menteshvili: “We have more than 100 funds listed, so we’ve already got the infrastructure here; the legal teams, administrators, all the things necessary to establish REITs and advise them on formation or complying with listings rules. It is a natural extension to our family of funds.”

She added that REITs will be treated no differently to any other closed-end investment company under the CISX’s rules. “The standards or rules we’re going to apply and what requirements are needed are quite straightforward. For example, there are the stipulations for all investment funds investing in property to have certain disclosure requirements in respect of the value of any properties or land already invested in.”

Choices, choices

Many investors already know the CISX as a home for Guernsey and latterly Jersey-based REITs. These have been available for some years and have a successful track record.

While the UK REIT provides competition to its counterparts in the Channel Islands, Menteshvili does not believe it will lead to a decline in formations of the latter. “Guernsey and Jersey REITs will continue as an alternative product. People will measure what they want to create, for what reason and whether they want to take advantage of the opportunity of a UK REIT or another structure. It is about the investment opportunity they are seeking.”

For example, UK REITs require a minimum of three commercial properties, all of which have to be making an income. This is different to the requirements of investment funds focusing solely on property development in foreign countries, for instance.

For people considering forming a REIT, but unsure whether it should be UK or Channel Islands-based, Menteshvili believes each case should be considered on its merits. “It is looking at what the advantages are because there are certain conditions that must be met, but if all the criteria are met then there are some very handsome tax benefits.

“That is the idea â“ are you going to be able to extract those benefits among the trade offs. That’s why you haven’t seen a rush to form REITs because people are still taking a measured view.”

But with the property sector remaining buoyant â“ and with little sign of a significant slowdown in the near future â“ Menteshvili is confident that UK REITs, along with existing REIT structures and property funds, will continue to flourish. “There are clearly some advantages to the UK REIT structure that some will find useful. There will be new REITS taken up in due course.”

Tamara Menteshvili will be speaking about REITs and the advantages of listing one on the CISX at a seminar on May 1.

The seminar, organised by law firm Ogier, will see Menteshvili focus on the advantages of listing on the CISX for UK and non-UK investors, such as; having established a framework for a REIT; the opportunities it provides; the advantages of the CISX’s listing rules and its history.

In addition, experts from Ogier will talk about how to use a Jersey company as a REIT, domiciling the company in Jersey but registering for tax purposes in the UK and looking more closely at the REITs requirements criteria and investment funds generally in Guernsey and Jersey.

“It is a good opportunity a few months on from the launch of the REITs to take stock of where we are and to enlighten the marketplace in more detail,” Menteshvili says.