Know your REITs

Picture the scene: you are at another hotel networking event, happily chatting away, when all of a sudden people start talking about REITs and PIFs. Everyone is getting excited about them, hands gesticulating aggressively as they debate the pros and cons. You stand on with a confused look in your eyes and slowly back away into the corner. But fear not, Caterer has enlisted Alister McCutchion, associate director of property consultant CB Richard Ellis, to explain exactly what REITs and PIFs are and why they are setting the industry's pulse racing.

Why might PIFs be a good thing? As part of the Budget in March the Government announced the start of a consultation into the possibility of setting up property investment funds (PIFs) in the UK. In other parts of the world PIFs are called real estate investment trusts (REITs).

The consultation has been long awaited by the UK's property industry, as PIFs will allow property investment companies to act in a more tax-efficient manner and will boost the amount of investment capital available by allowing individuals to invest directly in large-scale commercial property.

How will they do that?
By introducing a company structure that pays no tax at a corporate level but is required to distribute a high proportion of its income as dividends to its shareholders. Instead of taxing the property vehicle, tax will be levied on the shareholders when dividends are distributed.

PIFs may also be required to be listed on the Stock Exchange, which, along with regulation by organisations such as the Financial Services Authority, is intended to provide the necessary investor information flow and corporate governance health checks that help reduce investment risk.

So why is the hotel industry getting so excited? Total property investment in Europe last year was about g82b (£54b). Of this, hotels accounted for about g4.9b (£3.2b), and the UK alone accounted for about g2.4b (£1.6b). The UK is now a significant investment market, and in recent years property investors have become more and more interested in the hotel sector, resulting in a significant amount of money becoming available from sources that would previously have shied away from such a specialised industry.

Any issues the industry should be concerned about?
One of the matters for consultation is the definition of property that PIFs will be able to invest in. The consultation paper suggests that PIFs should invest only in property types where the rental returns reflect the underlying property asset. Under this definition, it suggests, land and buildings forming part of a leisure trading company, eg, hotels, would be excluded. The issue could be resolved, however, by legislating the amount of control retained by the hotel over the property asset for it to be "PIF-able".

There are other issues surrounding the introduction of PIFs that could affect the hotel sector more than other commercial property classes. These include the level of gearing that will be permitted, the treatment of capital allowances and other taxes, etc. However, given the popularity of PIFs in the countries that have them, it would be counterproductive for the hotel sector to be excluded from investment by these companies, especially at the point where such investment is really starting to escalate.

So, should the industry be doing anything now? The Government's consultation period ends on 16 July and it is key that the hotel industry makes its voice heard now rather than after legislation has been drafted. We believe that these structures represent a new and exciting source of investment capital in our industry.