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Julia Goldsworthy (Falmouth and Camborne) (LD): We shall deal with the broader issues connected with REITs during the stand part debate and during debates on the remaining clauses in the Standing Committee, so I shall attempt to be brief.

We think that amendment No. 24 provides a welcome way of assessing the impact of the number of commercial companies that register with the scheme. It addresses concerns that were raised more generally on Second Reading, when it was pointed out that many existing commercial property companies appear keen to convert to REIT status. The fact that there are large numbers of those companies indicates that the incentives for businesses to convert may be greater than the initial revenue figures in the Red Book suggest.

The Red Book figures show that the introduction of REITs will bring in revenues of £35 million, £155 million and £135 million, respectively, in the three years from 2006–07. Those revenues include the 2 per cent. entry charge that will be imposed on companies opting for REIT status, so the early years will flatter the fiscal position. The amendment would help to monitor the number of companies entering the scheme each year, but will the Minister provide a longer-term projection of predicted revenue?

Ultimately, companies will choose to become REITs if they forecast that their entry charges eventually will be outweighed by future tax payments. What work have the Government undertaken to assess the net impact of the introduction of REITs, in terms of entry charges and changes to tax revenues? The amendment would help us understand a little more about how the scheme affects behaviour, but we need a clearer understanding of the wider fiscal impact.
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I turn now to amendment No. 4. We do not want REITs to be extended to the alternative investment market at this stage, because we understand that their whole point is to provide a low-risk, stock market avenue for investment in property. The AIM carries a higher risk and is less regulated, and therefore undermines that principle. The fact that it lists a rather oddball property investment company based in Bulgaria underlines the need for caution, and points to the higher unknown risk that AIM investments could present. Last year's fiasco with self-invested personal pensions shows that it is important to get first principles right before consideration is given to extending the scope of the REIT scheme.

In the future, it may be appropriate to consider ways to make the scheme more flexible. The alternative investment market might achieve that, but it is important now to make sure that the REIT scheme is achieving what was intended and that it is functioning properly.

Mr. Francois: The SIPPs problem was the fault of the Government, not of AIM or the stock exchange. The hon. Lady had a bit of a pop at AIM, which most people think has been quite a success. Do the Liberal Democrats consider investment in AIM-listed companies to be unsafe in principle?

Julia Goldsworthy: Absolutely not. My point is that such companies are a higher-risk investment, whereas the REIT scheme offers people a lower-risk opportunity to invest in property. That is why it is not appropriate to include AIM-listed companies in these provisions.

Amendment No. 23 deals with the definition of a close company, and would remove clause 106(6), which prohibits a close company from becoming a UK REIT. A close company is defined in section 414 of the Income and Corporation Taxes Act 1998; broadly speaking, it is one that is controlled by five or fewer shareholders, as we have heard, but the definition in clause 106(6) is wider than was the case in the draft legislation, which contained a 10 per cent. shareholding restriction.

It is important that some form of restriction is retained, to ensure that no individual is able to invest in property for his or her personal benefit. That is why the close company restrictions have been included, but the reasonable concern has been raised that the Bill will require companies to monitor their shareholders continuously to ensure that the condition is not breached. Clearly, however, the actions of the shareholders are outside the REIT's control, and I would appreciate the Minister telling the House how a trust is supposed to anticipate or prevent such breaches.

We believe that deleting clause 106(6) altogether, as proposed in amendment No. 23, is too drastic and could make the scheme vulnerable to the abuse that is tax avoidance. However, if the clause is to be retained in its existing form, the Government will need to explain, perhaps in Standing Committee, how they expect REITs to monitor and enforce the regulations. They should also specify the penalties if the conditions are breached, because automatic exclusion of a trust could increase the risk associated with investment and serve to put investors off.
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This matter would benefit from consideration in Standing Committee, where we could study the details more closely, in conjunction with the other clauses relating to REITs. We share some of the concerns behind the amendment, and look forward to the Minister's response.

Sir George Young (North-West Hampshire) (Con): I begin by commending my hon. Friend the Member for Rayleigh (Mr. Francois) on his thoughtful and well-informed speech. I refer, as I did on Second Reading, to my entry in the Register of Members' Interests.

I hope that the Minister will be able to respond to one matter raised by my hon. Friend; the elephantine gestation period for real estate investment trusts. We spent most of yesterday discussing some ill-considered proposals in the Finance Bill that were rushed through with the minimum of consultation, whereas today we are debating a relatively non-controversial proposal that has all-party support and has been around for about 10 or 12 years.

It would be helpful if on clause stand part, in response to the debate, or in Standing Committee the Minister responded to some of the matters that were raised on Second Reading but which, understandably, he did not have time to address. Will he say why we have had to wait so long for a proposal that is not particularly controversial, which replicates the investment trust regime and REITS, and which, as my hon. Friend said, exists elsewhere?

I shall make two points; the first is on dead-weight costs, which were mentioned in the Financial Secretary's winding-up speech in the previous debate. I do so in the context of amendment No. 24, which asks for an annual report. Do the Government believe that REITs will simply be a new vehicle for existing activity or a vehicle that encourages additional activity that would not otherwise take place?

My impression from reading the consultation papers and some of the debates on the subject is that most of the interest in REITs comes from existing, well-established companies that envisage reversing into REITs and carrying on doing roughly what they were going to do before. The original concept of REITs was somewhat different, however; it would be a new vehicle that promoted additional investment that would not otherwise take place.

I was interested to read what my hon. Friend and the hon. Member for Falmouth and Camborne (Julia Goldsworthy) said about the AIM market. My hon. Friend said that new supply and additional investment are more likely to come from smaller companies that want to grow than from well-established companies that may simply be holding companies for existing assets rather than developers. The argument about AIM is finely balanced but which side one comes down on depends to some extent on what one sees as the objective of that vehicle.

It would be helpful if the Minister explained either in the annual report that I hope we are about to impose on him or, more economically, in his response to the debate, to what extent the proposal is a new badge on something that is already happening or an opportunity for fresh investment that would otherwise not have taken place.
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My second point is on the balance between commercial and residential investment. I touched on the matter on Second Reading and I hope that it will be raised in our debate on the proposed report in amendment No. 24. As I said on Second Reading, the original thought behind REITs was to promote residential investment, where there is more pressure on the demand side; one cannot directly invest in residential property, whereas there are several vehicles for investing in commercial property.

Although the original thrust of the debate about REITs was on the residential side, at some point it was diverted into a preoccupation with the commercial property side. I have nothing against that. I am in favour of the proposal, but the Barker report, in which the Treasury had an enormous interest, was very interested in promoting additional supply on the residential side. So far, we have not heard from the Government on the extent to which they hope that REITs will feature by generating fresh, respectable, long-term institutional investment in residential property for rent as opposed to being a vehicle for commercial properties.

In conclusion, I hope that we can tempt the Minister into philosophical mode and into raising his sights beyond the nitty-gritty of the amendments and that he will put the clauses into the context of where the Government are heading, what they hope to achieve, and the balance between residential and commercial property.

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