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How REITs could reshape UK hospitality

08 July 2005
How REITs could reshape UK hospitality

Andrew Sangster, editor of Hotel Analyst, looks at the impact on the hotels sector of the new system of financing property companies planned for the UK.

You may not have heard of real estate investment trusts (REITs) but by this time next year they could be transforming the hospitality industry.

They are, potentially, a new source of funding for hospitality businesses and in particular may enable more cash to be spent on updating or renewing the buildings in which such businesses are run.

The magic pill that facilitates the change is the removal of tax.

At the moment, any UK company that owns property has to pay corporation tax (income tax for companies) and investors in that company are taxed again when they receive payouts in the form of dividends.

Now the UK is talking about introducing them and is in a head-to-head race with Germany to put legislation in place.

The first proposals about REITs in the UK were made back in March 2004, when the Treasury released a consultation paper on the issue.

The hospitality industry was aghast, however. The Government seemed intent on excluding it entirely.

A clause in the consultation paper said that companies, such as leisure businesses, where the property income was mixed in with the income generated by the operating business, would be excluded.

But an industry consultation process was launched - by lawyers CMS Cameron McKenna, property advisers Jones Lang LaSalle Hotels and the investment-focused industry newsletter Hotel Analyst - to put the industry's case.

With the help of the leading figures in hotel investment in the UK, a briefing paper was drawn up and submitted to the Treasury (see www.law-now.com for a copy).

The Government listened and changed its mind: the latest consultation document issued at this year's Budget in March, removed the exclusion for hospitality companies. The hospitality industry won its case.

You may be wondering why all this arcane tax lawyer information matters. It matters because the hospitality industry as you know it today could be radically changed.

The nearest example to what may happen is the revolution that swept through the tenanted, and to an extent the managed, pub industry.

The cause of the change was a new financing technique called securitisation that allowed the owners of the tenanted pub chains to borrow money cheaply on the back of the promise of the future income of those pubs.

This radically lowered the cost of capital for people using this technique and enabled Japanese bank Nomura, the pioneer of securitisation in the UK leisure industry, to become the biggest owner of pubs in the country in a matter of years.

REITs will similarly lower the cost of capital for the owners of hospitality property.

But unlike Nomura, a REIT will not be allowed to run the hospitality business as well.

The much-heralded separation of property and operating company - the bricks and brains split - will be forced on any businesses bought by the new REITs.

It will bring about a fundamental change to the structure of hospitality in the UK.

A longer version of this article appears in this week's Caterer and Hotelkeeper magazine (7 July 2005).

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