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Mr. Francois: I am sorry that my hon. Friend was slow off the mark, but I am speaking now, and I am happy to accept an intervention from him. I shall do my best as a stand-in and try to answer his questions.
Mr. Quentin Davies: I am grateful to my hon. Friend for his kind suggestion, but I am not sure that he is in a position to help me, because I wanted to remind the Minister that he promised to deal with my question about regulations that could limit REITs' capacity for leverage. He did not manage to address that point, contrary to the undertaking that I believe he gave me.
Mr. Francois: If it assists my hon. Friend, I am happy to act as an intermediary. I understand that there is a condition on a gearing ratio of 1.25:1. That is the basic answer to his question, but if the Minister has anything to add he is welcome to intervene on me.
This has been a useful start to our discussion on the concept of REITs, which are a principal component of the Bill. Most contributions to the debate were well informed, but I am afraid that I must make an exception for the hon. Member for Falmouth and Camborne (Julia Goldsworthy), as she took a side-swipe at the alternative investment market. [Interruption.] Well, she was a little undermined by the intervention of her hon. Friend the Member for Caithness, Sutherland and Easter Ross (John Thurso), who pointed out that he had been an investor in that market, although he was honest
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enough to say that he had not enjoyed tremendous success. On the degree of risk in AIM, it is important to stress that in many cases it is investment managers' responsibility to decide where to invest institutional money. They are paid a great deal to make risk decisions, and they are well placed to try to decide whether it is best to invest in an AIM company. Companies are allowed to list on AIM, but people are not forced or compelled to invest in them. If companies are strong and credible, people have the option of investing in them, whether they are institutional investors or individuals. If they are not strong and credible, they will not do so. That is a perfectly reasonable response to the point made by the hon. Member for Caithness, Sutherland and Easter Ross.
Julia Goldsworthy: May I point out to the hon. Gentleman that I was stressing the importance of risk? REITs are about to be set up, but the matter should be revisited once they are more firmly based. That does not constitute a side-swipe at AIM.
Some of the questions that I asked were ably amplified by my right hon. and hon. Friends. However, I am not sure whether the Minister fully addressed the important point made by my right hon. Friend the Member for North-West Hampshire (Sir George Young), who has a background in housing. On Second Reading he stressed the question of whether REITs would benefit the residential property market. Most of the discussion about REITs has been about the way in which they affect the commercial property market, and most people approach them from that perspective. However, REITs provide an important opportunity to boost residential property in this country, not least as some people find it difficult to afford a house, and therefore want to rent. I commend my right hon. Friend for raising that issue, and give the Minister notice that we shall want to explore it in more detail in Committee.
Mr. Quentin Davies: Does my hon. Friend agree that it may not be entirely sensible to have a restriction of 1.25:1 on the maximum leverage that a REIT can undertake? There is nothing to stop a REIT from investing in a project or a building which itself carries a much greater degree of leverage. Investors will not be protected by this restriction. On the other hand, it prevents somebody from setting up a REIT with the specific objective of offering a highly leveraged play in the real estate market. Some people might like a higher-risk instrument at certain stages of the property cycle, so why should the Government officiously cut off that opportunity? Does my hon. Friend agree that this matter has not been as thoroughly thought through as it might be?
I thank my hon. Friend for raising that important point. I have not delved into the gearing ratio, because it was not one of the conditions in clause 106 on which I decided to concentrate today. My hon.
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Friend has put down a marker from his own perspective, and I am sure that the Minister and I will want to debate the matter in detail when we get to the appropriate clause in Committee.
Mr. Gauke: At an earlier stage the Government proposed a leverage limit of 2.5:1; now, it is 1.25:1. In February the Royal Institute of Chartered Surveyors argued that that restriction was unnecessary because the market will restrain excessive borrowing and ensure a reasonable level of taxable deductions. That tends to be the international norm. In many jurisdictions there is no leverage limit.
Mr. Francois: I thank my hon. Friend for reiterating that point. I will not respond in more detail for fear of straying beyond the bounds of order. Nevertheless, I commend my hon. Friends the Member for South-West Hertfordshire (Mr. Gauke) and for Grantham and Stamford (Mr. Davies) for their ingenuity. Suffice it to say that we shall want to explore the issue in more detail when we move upstairs.
I thank my hon. Friend the Member for South-West Hertfordshire for his assiduous research on how REITs work in other jurisdictions around the world. He saidthis is important in relation to AIMthat one day the United Kingdom might become the REIT capital of Europe. Were that to happen, I am sure that we would all welcome it. However, it will require a regime that is flexible and encourages investment. I want to make a couple of points about that. There are already several offshore property vehicles, which have mushroomed in the past few years while everyone was waiting for REITs, but they did not turn up. Jersey has been mentioned in that context.
One of the tests of the REITs regime will be whether it succeeds in bringing that money, or at least a fair proportion of it, back onshore. The Government need to take that on board. Sophisticated institutional investors will carry out a cost-benefit analysis of the advantages or otherwise of different jurisdictions. They will look very carefully at the UK REITs regime, and I am sure that the ability to have several REITs companies invested on a fairly broad basis will have an impact on their decisions on whether to bring their money back onshore.
Mr. Gauke: My hon. Friend makes a good point. There are two tests here. Let me take the example of Jersey. First, will Jersey continue to expand or, as one would assume, slow down? Secondly, will the sums that have already been invested in Jersey come back onshore, and do we need a specific regime to encourage that? I hope that we will have an opportunity to explore that in Committee.
My hon. Friend has put down a marker, and I look forward to his amendment. He also referred to an important aspect of tax competition, which is important in the context of AIM. There is some tax competition between REITs in different jurisdictions. For example, the Singapore Government have recently decided to levy no tax on the dividends from REITs because they are trying to compete directly with REITs in Hong Kong. The Economic Secretary must examine that when considering the sort of regime that he wants to construct, because our regime in the
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United Kingdom will have to compete with, for example, that in France, and shortly that in Germany. He must bear all that in mind when he keeps those matters under review.
I welcome the Economic Secretary's general pronouncement that the Government are willing to keep the regime's operation under review. The industry, and investors too, will welcome that. If I heard him correctly, he said that the Government would be "willing to look at how flexible changes could be made in the future." That does not completely commit him, but it shows that he is open-minded and we welcome the statement in principle.
I also welcome the Economic Secretary's commitment not to publish the regulations as late as the night before we reach them in Standing Committee. The earlier, the better. The Government have had several years to prepare for the regime and, by definition, for the regulations. It would therefore be nice if we could have them fairly promptly. We cannot accuse the Government of not having had time to plan. The Economic Secretary said, in a positive spirit, "As soon as possible," and I reply, in the same spirit, thank youand the sooner, the better.
Our purpose in tabling the probing amendment on the annual report was to try to get from the Government some commitment that they would report to Parliament progress on the REITs concept. There does not have to be an annual report, but we tabled amendment No. 24 so that we could discuss the idea. The Economic Secretary responded by saying that it might be possible to include an update in the pre-Budget reportpresumably, that would apply to the report for 2007. I welcome the suggestion. I do not think that he promised to do that, but it might be useful for the pre-Budget report of 2007 to include an update, so that we can ascertain how the concept is panning out. On that basis, I shall not press amendment No. 24.
I am grateful to the Economic Secretary for clarifying the technical point that I raised when considering amendment No. 23 on close companies. I am sure that the industry and the pensions industry will welcome that. I also thank him for his courtesy in offering to write to me specifically on the matter. I am sure that a clearly set out letter from him will solve the matter beyond peradventure. I look forward to receiving that correspondence so that the issue can be quietly put to rest. It would therefore be churlish of me to press amendment No. 23.
I must chide the Economic Secretary slightly in the context of amendment No. 4, because he said that AIM was not regulated. To be fair, I believe that he corrected himself. AIM is regulated, but more lightly than a full listing on the stock exchange. Most investments involve some risk. There is, arguably, a slightly higher risk in investing on AIM than in investing on the full London stock exchange, but it is not that different. It should be possible for people to decide for themselves whether they want to invest in a company on AIM or one that is listed on the London stock exchange, through examining the company's record, that of the directors, past performance and so on.
By not spreading the capability so that companies on AIM can achieve REIT status, the Economy Secretary denies potential investors such a choice. He also denies companies on AIM the choice to apply for REIT status
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if they wish. He could be compelling them to apply for full listing on the London stock exchange when they are not ready for it. They may feel that they have no option but to go for London stock exchange listing to get the tax advantages of REITs, and that they would be vulnerable to takeover by a REIT listed company if they did not do that.
If the Government do not give way on that issue, there is a genuine problem concerning the effect on the orderly running of the market. To those who said that we were going too far, I stress the fact that we received representations to press the argument to extend the provision to unlisted companies. We have not gone that far. We made AIM our sticking point today, and we have asked the Government to respond to that.
However, the Economic Secretary replied responsibly and gave a commitment to keep those matters under review. We shall need to see how the regime is working as it rolls out in 2007, and if it seems to need a further boost by extending the REITs concept to the AIM, I hope that the Government will be prepared to view the matter seriously and to allow the concept to be spread to a wider range of companies, precisely along the lines that my hon. Friend the Member for Braintree (Mr. Newmark) described. That has worked very successfully in the United States, and his point that unlisted REITs outnumber listed REITs in the US by a ratio of 4:1 was extremely pertinent.
The Minister has offered to keep the matter under review, and I thank him for what he has said this afternoon. We have had a very positive start to our discussion on REITs, and we look forward to more such discussions upstairs in Committee. On that basis, I beg to ask leave to withdraw the amendment.
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