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The Government have set out in their regulatory impact assessment some of the reasons for REITs and it specifically focused on the weaknesses within the property market and the areas where they could be improvement. In particular, it highlights the lack of choice for small investors, poor liquidity, the potential for more efficient use of commercial property, variable standards of provision in the private rented sector, high levels of debt financing and tax distortions. The Government's intention is to address those problems through the use of REITs. Paragraph 2.8 of the RIA states:
"The Government believes that the proposed vehicle addresses all of the above points by introducing more choice for small investors, allowing more liquidity in the market, giving potential for more efficiently and professionally managed property, reducing dependency on debt for financing and removing tax distortions."
We can also add the other factors that are favourable for REITs. There is a growing appetite for such products and their introduction should be good for the City of London and make it the leading REIT centre in Europe. We would all welcome that.
As my right hon. Friend the Member for North-West Hampshire (Sir George Young) pointed out, however, it has taken a great deal of time for us to get where we are. The idea of REITs has been around for a long time. In recent history, the industry made a great push to introduce them in 2000. That was unsuccessful, but the
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move was revived in 2003. Since then, there have been various discussion papers, culminating in this year's Budget with a view to the first REITs being available in January 2007. I used to work as a lawyer in a City firm and I know from personal experience that there was a great deal of expectation a couple of years ago that REITs were about to take off. Everyone was gearing up to prepare for that. However, the move slowed down and nothing very much happened.
There are one or two concerns about the delay. In that period, a lot of money has gone offshore. In particular, a number of Jersey property funds have been created that catered for something that perhaps could have been catered for by REITs. That is a concern for the City and a worry for us all. We are, to some extent, playing catch-up. In the past couple of years, Jersey has been able to develop as a market in this sector and it has gained reputational benefits perhaps at the expense of ourselves, because we are slightly behind the game.
It is important that we get the legislation absolutely right, because there is also the concern that the delay may in some way indicate the Government's half-heartedness. I hope that, by scrutinising the Government's position in this debate and upstairs, they will be able to make it absolutely clear that they are committed to REITs and see them as a long-term prospect.
Yesterday, we discussed issues such as the home computing initiative, in which something comes in with a tax incentive that is then taken away. That leads to a degree of uncertainty that is bad for investors and the industry. When there is uncertainty and changes, we do not attract the same level of investment. It is important for businesses to look long term and Governmentsparticularly this Governmentmove in a short-term fashion. I hope that we will in the debate obtain reassurance from the Government on their attitude to REITs.
It has to be said that there are positive aspects to the proposals. There is no doubt that the 2 per cent. conversion charge is what the British Property Federation was looking for. There is no criticism of the Government for introducing that. It is encouraging, and I hope that the Economic Secretary will continue in that vein later in the debate. It is important that we get this right and that we have close scrutiny of the proposals to ensure that there is a long-term commitment and that we do not have to change things in a couple of years. That would lead to the stability that would enable the REIT market to develop.
Turning to the amendments, I will address the issue of the alternative investment market. With a number of colleagues, I had a meeting with representatives of the London stock exchange just a week or so ago. The message is that AIM is a great success story. It has really taken off. The number of companies listed on AIM has expanded very rapidly in recent years and it has been a very useful attribute to the London stock exchange. We have, in the City institutions, something that we can be proud of and that is hugely important to the economy of this country. I hope that no hon. Member will suggest, in the course of the debate, that AIM is in some way dodgy or disreputable, or in any way something that we should be slightly embarrassed about. There may well be good arguments as to why REITs should not be listed on AIM, although, on the face of it, many REITs will be
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quite small entities and one would think that perhaps it might be appropriate to list them on AIM. I would be grateful to hear the views of the Economic Secretary on that point.
John Thurso: I should declare my entry in the Register of Members' Interests. I own 2 per cent. of an AIM-listed company; it has not done very well. Surely the point is that although AIM is an excellent market that has fulfilled its remit extremely well and is therefore to be congratulated and supported, there are a number of important fund managersparticularly in the case of pension fundswho, for reasons of policy, decide not to invest on AIM and to confine their investment to the main market.
The point of REITs is, among other things, to give those fund managers an opportunity to invest in an investment vehicle for property without the risk of being in a property company with developments, or being directly involved in property. Therefore, is it not perfectly appropriate to commence the scheme on the main market first, see how it goes and then extend it at a later stage to AIM, if thought fit?
Mr. Gauke: The hon. Gentleman may have a fair point, but perhaps the decision as to whether it is in the interests of a particular company to list on AIMhe may well be right that in many cases it will not be because certain investment managers will not invest in AIM-listed companiesshould be left to the company itself, rather than necessarily including that matter in the rules. However, as I said, I would be interested to hear the views of the Economic Secretary.
If we are considering REITs as a whole, one question that needs to be looked at in the longer term is whether we go further than listing on AIM and allow room for unlisted REITs. I know that the Royal Institution of Chartered Surveyors is looking at that as perhaps the next step. Again, I would be interested to know what the long-term views are.
Mr. Newmark: It may be instructive to look at the United States, which has a far more mature real estate investment trust market, where unlisted REITs outnumber listed REITs by a proportion of four to one.
On close companies, which my hon. Friend the Member for Rayleigh (Mr. Francois) addressed so thoroughly, one can look at that issue in conjunction with the 10 per cent. ownership rule, which, to use his terminology, falls within the yellow card regime as opposed to the red card regime that applies to close companies. One of his points was that REITs are not a unique product in the sense that there are many international comparisons. We have just heard a comparison with the United States from my hon. Friend the Member for Braintree (Mr. Newmark). It might be worth while to examine some of those international comparisons, because there are different regimes in different countries.
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On the internet this morning, I spotted a document produced by Ernst and Young, which is a summary of the tax treatment of REITs internationally. I will quote from it, but I should issue a word of warning; this is by no means a criticism of Ernst and Young. In my previous career as a lawyer, I was involved in collating international advice from various jurisdictions and then trying to summarise it in one document.
That task is notoriously difficult to perform. We are dealing with a complex area, and it is often difficult to simplify information and obtain advice from jurisdictions in which there may be language difficulties and considerable differences that are not always appreciated when one person is collating information. However, it is interesting to note the different requirements on ownership, which relate directly to the question of close companies.
In Australia, there are no minimum or maximum shareholder requirements. However, other international regimes impose more limitation or control on the ownership structure of a REIT, or equivalent vehicle, than that proposed for the UK. For example, the document says that, under the Canadian system, real estate investment trusts
but there otherwise does not appear to be any great qualification. If hon. Members are interested in Costa Rica, the document says that "25 or more investors" are required, as I am sure that the Economic Secretary is well aware.
Different rules thus apply in various jurisdictions and the area is complex. There is evidence from overseas that one could pray in aid of the amendment on close companies but, equally, evidence of more restrictive overseas requirements on the ownership of a real estate investment vehicle.
It is important that we get some indication of where the Government intend to go with this. On ownership, I believe that the purpose of the 10 per cent. rule is to prevent double tax treaties being used to facilitate overseas investors acquiring more than 10 per cent. and thus enabling them to benefit from double tax treaty provisions that would reduce their tax liability. I would be interested to know whether the Government are considering expanding the proposal, especially for specific vehicles, such as pension funds, which I understand, as a matter of practice, do not to tend to pay tax on properties in the UK in any event. Are negotiations taking place with other countries on double tax treaties to try to expand the area so that REITs fall outside it, which might enable the 10 per cent. provision to be raised a higher level, such as 40 per cent.?
The Government have at last progressed this matter, and we all recognise that that is a good thing. The signs are that the Government have listened to industry, particularly on the conversion charge not causing difficulties. Effectively, they have given the industry what it wanted. During this afternoon and in future we require a firm commitment from the Government that they will not abandon REITs if they find in two years' time that REITs are costing a bit of money. We do not want REITs to be struck out like a home computer initiative of its day. The industry requires a long-term commitment. I hope that the Government will be able to demonstrate that they have that commitment during the debate.
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