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Treasury considers opening up residential Reits

Monday 8th February 2010

By Mike Jones

After the buy-to-let investment boom, the man on the street could soon be investing in a piece of large-scale rented housing developments funded by institutions and listed property firms

The British Property Federation (BPF) has led an on-going campaign for reform of stamp duty rules which it says act as a huge disincentive.

The BPF has long pressed the Government to remove a stamp duty anomaly that means a single investor who buys a number of residential properties must pay stamp duty at a higher rate than investors who buy one residential property each. Targeted relief would remove this disincentive against large-scale investment in housing and make it more viable.

The Treasury is set to examine what barriers are stopping big institutions investing in large rental developments. It will also examine how real estate investment trusts (Reits) could help.

A Reit is a more tax-efficient structure enjoyed by big office and retail developers like Land Securities and British Land. Rather than buying bricks and mortar, people buy shares in the Reit as they would do with any other company’s shares. This would potentially mean that a lot more money could be available to build homes if the right structures are introduced.

Peter Cosmetatos, director for finance policy at the BPF, said: "We hope that this information collecting exercise will recognise how a targeted stamp duty relief could help the growth of private rental. If they are allowed to, Reits could also be a vehicle for large-scale residential investment to take place which could also be opened up to the man on the street.

"It had always been the hope that Reits with a residential focus would emerge, encouraging the development of a large-scale, professionally managed rented sector and at the same time allowing ordinary people, including those saving for a deposit to get onto the housing ladder, to invest in housing in a way that is liquid, well regulated and diversified. However, making Reits work for housing was not as easy as it was for commercial property. If residential REITs are to enjoy the success of UK commercial property REITs, changes need to be made to the legislation. This consultation should provide an opportunity for those changes to be explored and taken forward."

BPF residential committee chairman Alan Collett, consultant for Allsop, said: "It is illogical that large investors pay more for the same transactions as individual investors. For example, if they sold 100 flats to a 100 people, most people would pay 1-3%in stamp duty, whereas a large investor or institution would pay 4% outright since it’s charged on the entire purchase. This is a disincentive as it reduces the total return to investors and restricts the amount of new money going into housing.

"Although changing Reit regulations wouldn’t necessarily bring a residential Reit forward, the current rules are a major barrier. Specifically the conversion charges are a big problem as most residential Reits would be formed under new portfolios or new builds rather than existing portfolios. This means that the costs of procuring the properties and then becoming Reits would outweigh the advantages of Reits status."

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