UK Reits don't appeal in their present form

Real estate investment trusts (Reits) will not be taken up by the UK hotel industry until the legislation is relaxed, more in line with the US version, experts warned in Berlin.

Reits, introduced to the UK last year, are seen as a new source of funding for hotels, as they are exempt from corporation tax, enabling more cash to be spent on updating or renewing property.

But speaking at a panel session at IHIF, Jonathan Ashbridge, partner at law firm Maxwell Winward, said Reits are excluding large portions of the UK market in their current form.

"A lot of schemes have been put forward recently but then changed by the chancellor, and the UK version is still not as attractive as the US model," he said. "Reits would be more commercially viable if they could apply to management contracts as well as leaseholds, as they are currently not viable for the midmarket sector."

Marvin Rust, partner at consultancy Deloitte & Touche, agreed that changes need to be made to allow Reits to become more acceptable for the UK market.

"In the US it took several evolutions to get the formula right," he said. "This will be condensed in the UK but there still need to be changes to allow them to become more acceptable for the market."

Ryan Prince, managing director of hotel management company Realstar Group, said Reits will have to have a much lower cost of capital - the cost of equity and the cost of debt - to be worthwhile. "If they become the lowest cost of capital, then they'll become the investment vehicle of choice," he said.

Mike Goodson, managing director for Europe at Host Hotels, concluded: "I don't see Reits becoming a major investment for the hotel sector. Someone will do it, but I can't see it taking off in a major way yet."

By Emily Manson