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Mr. Francois: I thank the Minister for giving way so early in his remarks, and I notice his bullish opening. I appreciate the commitment that the regulations will be available before we reach the relevant clauses in Committee, but that could mean, theoretically, that they are published the night before. We would like to see them earlier, so that we have time to digest and, ideally, consult on them with interested parties before we start debating the clauses. I am sure that he will understand the reasons for that. It is a reasonable request. I wonder whether he can do a little better, under the circumstances.

Mr. Lewis: My undertaking could, theoretically, mean the night before, but I will do my best to ensure that the hon. Gentleman and other members of the Committee have sight of the regulations much earlier than that.

The hon. Member for Falmouth and Camborne (Julia Goldsworthy) asked me for a longer-term projection on receipts. That is not standard practice. In the present circumstances, three years is a reasonable period, but as the market develops during those three years, I am sure we will be able to consider a longer period.

As he did on Second Reading, the right hon. Member for North-West Hampshire (Sir George Young) raised a couple of important issues, with which I shall try to deal. He was keen to know our assessment of how much of the emerging market would entail the conversion of existing companies, and how much of it would involve new investment—newcomers to the marketplace. At this stage, the introduction of a UK REIT is intended to improve the situation for existing companies, but as a consequence of doing that we expect new companies to emerge in the marketplace. We believe that there will be a dual effect. The measure will initially assist companies already in the marketplace, and it will encourage newcomers to the market.
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The right hon. Gentleman also asked about the change of emphasis to commercial property. He will remember the housing investment trusts that were introduced in 1996 by the previous Conservative Government, which were specifically focused on low cost residential property. Sadly, no housing investment trusts were created as a consequence of that legislation, but UK REITs have always involved both commercial and residential property. Of course, the commercial property market is an important part of the economy, so it is vital that that market is working efficiently. I would not necessarily accept that there is undue emphasis on commercial property, but it is a very important part of this new development.

I shall come to the other points made by the right hon. Member for North-West Hampshire in a few moments.

The hon. Member for South-West Hertfordshire (Mr. Gauke) took us on a tour of the international community, of which I am sure we were all appreciative, in looking at the models that exist in different countries. I should like to make two points. It is important that hon. Members adopt a model that we believe is appropriate to the current UK market. However—this also responds to a point made by the hon. Member for Rayleigh—it is also important that we keep that market under review, as it develops.

We are willing to consider any consequence of market developments and what we are learning about what happens in the international community. We must always be willing to consider whether we want to change the regime in the interests of the market and clearly not to the disadvantage of the Exchequer. Of course, we can give a commitment today, in the context of the concerns that have been made or suggestions to do things slightly differently, that we will keep the situation under review. If necessary in the future, we would be willing to consider in a flexible way whether changes need to be made.

The right hon. Member for North-West Hampshire was keen that I try in my response to look beyond simply the amendments and put the UK REIT regime into a bigger picture or wider context. If you will permit me, Sir Michael, I intend to do that, as I develop my arguments. Of course, I will then deal specifically with the amendments and explain why we do not feel able to accept them at this stage, although we will reflect on the reasons why they have been proposed, quite responsibly, by the Her Majesty's Opposition.

I should like to remind the Committee of the rationale for UK regime, of which clause 106 is, of course, an important element. REITs exist in a number of other countries with well-developed property investment markets and provide a specific tax regime for investing in property. We believe that the time has clearly come for the UK property market to have access to such reforms. Investment in property can be undertaken both directly and indirectly, such as through a company or unit trust, but the way in which property companies are currently taxed has led to inefficiencies in the way that markets operate.

Property companies are taxed at corporate level on their rental income in the same way as all other companies. However, as a consequence, for many types of investor—for example, pension funds, and I will deal with the comment about pension funds—the overall tax
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effect of investing indirectly through a property company is higher than if they had bought the property directly. That tax distortion has led to significant inefficiencies in the market, as tax has often been a primary driver of investment decisions, and the Government are seeking to remove that distortion with the introduction of this legislation.

I want to talk a little about the market inefficiencies that we believe require addressing. First, there are high barriers to entry to investment in the property market, particularly in commercial property, where few retail investors have access to that asset class, given the scale and cost of the underlying property assets. The introduction of UK REITs will therefore help to improve access for all investors by allowing smaller, more liquid investments.

Secondly, as I mentioned earlier, there are a number of ways for investors to access returns from property: direct ownership, onshore and offshore unit trusts, limited partnerships and companies. Given the differing tax regimes that apply to those vehicles, investing in property through a listed UK company is relatively unattractive. As a result, the commercial property investment market is now characterised by poor levels of liquidity, with pricing and investment decisions largely determined by individual transactions among a relatively small number of players. REITs will offer the opportunity for a more liquid market, with improved transparency and scrutiny, by removing the tax disadvantage that listed property companies currently face.

5 pm

Thirdly, UK property companies have tended to have a market value lower than the value of their net property assets, a feature caused in part by the tax system. That has led to a strong reliance on debt financing as equity investors are less attracted to listed property companies. The UK REIT regime will reduce the impact of tax as a significant factor in the choice between debt and equity in raising capital.

Fourthly, a high proportion of commercial property in the UK is owner-occupied, and there is some evidence that this property tends to be used less intensively than property in the investment market. The introduction of UK REITs offers the opportunity for greater economies of scale, as a new tax-efficient vehicle will be available through which property can be released into the investment market.

Finally, as highlighted by the Barker review of UK housing supply, UK REITs offer the opportunity to provide greater institutional and professional investor involvement in the private rented sector as an alternative to the direct buy-to-let market. That will help to address the variable standards of management and quality of housing stock, particularly at the bottom end of the private rented sector, as well as providing developers with a more efficient and liquid investment market into which newly developed private rented accommodation can be sold.

Furthermore, while we are on the subject of housing, the introduction of the UK REIT regime supersedes the housing investment trust or HITs regime, introduced in the Finance Act 1996. It has been confirmed through consultation with industry that the provisions of the
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HITs regime were never utilised. The Government therefore propose to repeal the relevant parts of the Taxes Act.

In summary, the proposed UK REIT regime will help to address the various problems that I have just described, and we believe will lead to a more efficient property investment market in the UK. At the same time, the Government have always stated that one of our objectives is to retain fairness for all taxpayers by ensuring that UK REITs are introduced at no overall cost to the Exchequer. For that reason, companies joining the UK REIT regime will be required to pay an entry charge, details of which are set out in clause 112.

Mr. Quentin Davies (Grantham and Stamford) (Con): Are there any proposed restrictions on the degree to which these REITs can be leveraged? I am not suggesting that there should be, but it should be clear whether leverage will be possible.

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