The announcement last Autumn that the UK Government was prepared to consider introducing a tax transparent vehicle for UK property investment was received with a large degree of enthusiasm by the majority of the UK property sector, who had long campaigned for such a vehicle. The lack of such a vehicle was perceived to disadvantage UK real estate as an investment medium, and to result in an increasing flow of UK funds into offshore vehicles.
When they arrived in March, however, the government’s proposals for ‘Property Investment Funds’ (PIFs) failed to live up to expectations. Clearly they represent a step in the right direction, and for that alone they are very welcome. But many key questions have been left unanswered, and there are pointers in the consultation paper to restrictions, which could significantly reduce the attractiveness of such a vehicle.
There is a real risk that, in its desire to produce a vehicle that is attractive to a wider investor base, the Government will subject PIFs to such a high degree of regulation that they will simply be unworkable. Take the minimum distribution requirement; the Government is currently proposing a distribution requirement of 90% of a PIF’s income before depreciation. No problem there. But the consultation paper goes on to suggest that there should also be a requirement to distribute capital gains; the logic being that the resulting need to raise replacement capital in the market would introduce the added benefit of continual scrutiny. Fine in theory, but surely unworkable in practice. A more realistic alternative might be to have no requirement to distribute gains but, instead, a requirement to reinvest disposal proceeds within a set timeframe.
There are similar issues in relation to the potential requirement for listed status, restrictions on gearing, the approach to asset management, and a minimum investment level in residential property.
At the recent British Property Federation conference, Ruth Kelly (Financial Secretary to the Treasury) declared that the government still had an open mind as to the PIF’s precise mechanics; this is likely to be tested over the coming months. PIFs are vital in order to expand the investor base in UK real estate, but there is still a way to go in achieving a vehicle with broad appeal. The good news is that property investment trusts have been around for decades so there is ample opportunity to learn from experiences in the US, Australia and France.
For institutional investors, this might be a more efficient way to invest in property but not if it comes with undue regulation. Historical returns on real estate have outstripped gilts and equities so a vehicle that encourages institutions to increase their allocation to real estate must be a good thing.
Ruth Kelly is inviting all stakeholders to respond so institutions have an opportunity to help shape the outcome of the debate.
Richard White is a tax partner and property sector leader in Ernst & Young’s Real Estate Group

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