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However, there are still some weaknesses in the proposed REITs regime that I should like to address, both in relation to our amendment No. 130 and to amendments Nos. 60 and 61, which have been tabled by my right hon. Friend the Member for North-West Hampshire (Sir George Young). I shall begin, however, by referring to Government amendments Nos. 27, 28, 29 and 30.
Government amendment No. 27 relates specifically to clause 107 of the Bill, which deals with the conditions necessary for a business to qualify as tax exempt under the REITs regime. Condition 3 of clause 107 is that owner-occupied properties should be excluded from tax-exempt status. In Committee, we discussed the operation of condition 3 in some detail—particularly in relation to car parks, as I recall. A related issue had arisen during the consultation process that preceded our Committee deliberations, which was the definition of “owner-occupied” as generally understood under international accounting standard 40—known as IAS 40 for short. That problem threatened to create unintended consequences for the REITs regime. The problem would be that if, in certain circumstances, an REIT company were to provide significant services to the occupier of one of its properties, the company might itself be deemed to be an owner occupier under the strictures of IAS 40, and therefore fall outside the REITs regime under condition 3 of clause 107.
Government amendment No. 27 seeks to address that by ensuring that in such circumstances, where the tenant has exclusive occupation of the property, the accounting definition of “owner occupied” is effectively overridden, so that the REIT company is not deemed to have breached condition 3 of clause 107. The associated Government amendment No. 30 appears to be essentially a drafting amendment, which ensures that the revised application of clause 107 is extended to group companies via a corresponding change to the associated schedule 17. So far, so good.
The British Property Federation welcomed the amendment with the following comment, which is germane:
“We welcome this amendment, which addresses a concern raised by industry during the consultation. However, we are aware that there may be a number of different situations where the definition of owner occupied property inadvertently causes a property to be excluded from the tax exempt business. Government should be aware of this and have a strategy in place to listen to industry concerns and react quickly to those situations through producing appropriate guidance.”
That seems a not unreasonable request, given that this is an especially complex area. I hope that the Minister and his officials can liaise with the industry to try to address, as far as practically possible, any remaining anomalies in the subsequent guidance, in the light of ever-changing commercial circumstances. At some point, the guidance might have to be updated to take account of changing market conditions. Perhaps the Economic Secretary will address that question when he sums up.
Government amendments Nos. 28 and 29 relate to schedule 16 to the Bill. Schedule 16 defines various categories of business and income which are specifically excluded from the REITs regime. Those amendments relate to questions raised about the operation of the schedule in Committee, and when we
debated the related clause 111—the issue of potential double taxation of properties held on so-called trading account, and yet another issue relating to the definition of owner occupation, to reiterate the point about the complexity surrounding that term.
In essence, those measures were originally proposed in the associated draft regulations, on which I spoke for the Opposition. In Committee, the Economic Secretary intimated that he would be likely to introduce amendments on those subjects on Report, and therefore to include such elements in the Bill, which in principle we welcome. He has kept his word and we commend him for that. We still hesitate about the solution, however, in this instance of what one might call clarification by exclusion. Even though the Government’s solution will now appear in the Bill, they still seek to achieve that clarification by extending the inclusion to encompass all so-called trading properties, which underlines how little this part of the Bill does for residential property, as that is a particular challenge for residential property companies. I shall refer to that topic again shortly, although I suspect that my right hon. Friend the Member for North-West Hampshire will also be keen to catch your eye on that, Mr. Deputy Speaker, when he speaks to his amendments.
Our amendment No. 130 is designed to extend the qualifying conditions for a company applying for REIT status under clause 106, specifically by allowing REIT companies to list on the alternative investment market of the London stock exchange—AIM, as it is now more popularly known. When the matter was touched on in Committee of the whole House, Ministers pointed out that, under EU law, that would also entail reciprocal listing on other comparable EU exchanges. Our amendment specifically caters for that, so I hope that it will be more acceptable as a result.
There are several good reasons why REITs should be able to list on AIM. First, property companies registered as REITs are likely to enjoy significant tax advantages over those usually smaller companies denied that status. It therefore seems probable that there could be considerable consolidation in the property market, as AIM-listed companies that cannot qualify for tax-exempt status are gradually taken over by companies on the full listed market that do enjoy those tax advantages. That is potentially unfair, and could cause the United Kingdom property market to be increasingly dominated by a relatively small number of very large REIT companies. That is presumably not what the Government intended when they introduced the regime.
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Secondly, AIM-listed companies themselves might come under pressure to convert to a full stock exchange listing before they are really ready for it, principally in order to be able to qualify for REIT status, thus potentially causing a distortion in the orderly evolution of the market sector. Why not expand the condition at least to cover AIM-listed companies that meet all the other conditions in the Bill? There are a number of them and we have already debated them at length, so I hope I need not repeat them now. That would facilitate greater diversity in the REITs market available to investors.
I think the third point quite important. I am sure that, given his business experience in the United States,
my hon. Friend the Member for Braintree (Mr. Newmark) will want to expand on it. US experience suggests that widening the listing base is a good way of helping the concept to take off. The Financial Times estimates that more than $300 billion is now invested in US REITs, and notes that spreading the listing base was important to the generation of that significant investment. Our Government would presumably like to emulate that as well, at least on a comparable United Kingdom scale. We know that it worked well in the United States. Why should we not learn from that example? As the Americans have one of the oldest established REITs regimes in the world—I believe that it began in 1960—they have considerable experience in operating REITs, and they found widening the listing base to be a good way of helping the concept to grow. Why do we not learn from our American cousins in this instance?
Mr. Brooks Newmark (Braintree) (Con): I believe that one of the advantages of the American experience, which ties in with something that the Government are trying to achieve, is that quite a large unlisted real estate investment trust market stimulated residential housing. That is one of the Government’s objectives. Conservative Members fear that not having an unlisted market, or even allowing REITs to be listed on AIM, will tend to skew investment towards the commercial rather than the residential market.
Mr. Francois: That is an important point. As we said in Committee, we believe that one of the weaknesses of the current regime is that it is already heavily skewed in favour of commercial property. Leaving this impediment in the Bill may make the position worse. I shall say more about that shortly, while—I hope—not entirely stealing the thunder of my right hon. Friend the Member for North-West Hampshire.
The listing issue is a particular impediment for residential property companies that seek REIT status. In Committee, I made the general point that the REITs regime appeared to have been designed primarily with commercial property in mind, residential property having been included almost as an afterthought. I said at the time that I wanted to initiate a debate on that, and on what might be done to deal with it.
The fact that there appears to be a problem with residential REITs is illustrated by the fact that several major commercial property companies, including Land Securities and Hammerson, have already indicated that they have decided to convert to REIT status. As far as I am aware, no residential property company has yet made such a firm commitment.
Ed Balls: On Friday 2 June, the Financial Times reported that a consortium of 17 housing associations was planning to launch a REIT. As we discussed this in Committee, the hon. Gentleman knows that we expected the residential REIT decisions to come later than the commercial decisions. I do not know whether he has any further information, but certainly on 2 June there were indications that housing associations were considering taking that step.
Mr. Francois:
I thank the Economic Secretary for that intervention, but he highlighted the difference himself. He said that residential property companies are considering
taking such a step, but commercial property companies have said definitely that they will do it —[ Interruption. ] He asked me a question and he must allow me to answer it. The difference is that several commercial property companies have said that they will definitely do it. A consortium of housing associations has said that it is considering doing it, but as I read the FT it has not said that it will definitely do it. So we still do not have a concrete example of any residential property company saying that it will convert to REIT status on these terms. That is an important distinction.
Mr. Newmark: I suspect that part of the consideration for residential property companies is the cost of listing, as well as the additional regulatory burden. I suspect that that is the focus of the debate.
Mr. Francois: Yes. If a company is thinking of listing on AIM it will bear several factors in mind, including the cost of that listing and compliance. If it is thinking of upgrading to the full London stock exchange, the cost of compliance and registering will also form part of its consideration. My point is that as the regime exists, it may encourage some AIM companies to go for a full listing when they otherwise would not be ready. They feel that they have no choice, because if they are going to remain in property, they need the tax exemptions to qualify as a REIT company. If they do not qualify and just sit on AIM, they may be vulnerable to takeover by fully listed companies that have that tax wrapper to enhance their power. My hon. Friend again makes an apposite point.
We have established that there has been no definite announcement by any company to convert to residential REIT status. Moreover, residential property companies tend to be smaller, both by market capitalisation and the actual book value of their portfolio, than commercial property companies. While there are several residential property companies that might have little difficulty in obtaining REIT status on AIM—some 60 are registered on AIM—forcing them into a full listing before they are ready could be a serious impediment to them. The British Property Federation argued that point in a note on the subject:
“The property industry in the UK believes the consequence of limiting REITs to listed companies will be to unnecessarily limit the development of REITs because it heightens the barrier for new entrants to the UK REIT regime and as a consequence makes it that much more difficult for new REIT companies to form. Clearly, this has consequences for those seeking to establish new investment vehicles in traditionally under-invested property markets, such as the residential private rented sector.”
Fifthly, AIM is specifically designed to help emerging companies that wish to be open to public investment, but would find it difficult to sustain themselves on a recognised stock exchange at an early stage in their development. The London stock exchange describes AIM on its website as
“the most successful growth market in the world”.
“Since AIM opened in 1995”—
under a Conservative Government, I remind the House—
“more than 2,200 companies have been admitted and more than £24 billion has been raised collectively.”
As of May 2006, there were 1,528 companies, of which 1,266 were in the UK and 262 were international, listed on AIM. Those companies had a total market value of £74.2 billion and a turnover value of £28.6 billion, to May 2006. So AIM is a very successful market in its own right.
Amendment No. 130 seeks therefore to open up the current clause 106 legislation to allow companies listed via AIM to convert to REIT status. That will enable the development of new or smaller companies in the REIT market, thus helping to ensure that REITs are a sustained, successful investment vehicle across the property market.
Sixthly, and importantly, during the Committee of the whole House, the then Economic Secretary argued that an impediment to allowing REITs to list on AIM was that under EU law they would need similar listing opportunities on comparable EU exchanges. However, unlike our amendment at that stage, our amendment No. 130 specifically allows for that point. Moreover, the first condition of clause 106 is that to qualify for REIT status a company must be resident in the UK in any case, so even though a company could theoretically list on an alternative EU exchange rather than on AIM, given that it must be UK-resident to comply with the REITs regime generally, in most cases the most likely scenario would be for a UK listing, at least in the first instance. Common sense suggests that in the majority of cases a UK-resident company would probably register on AIM first, rather than going to one of the alternative EU markets. Even were that not the case, and the company registered on one of the alternative EU markets, why in principle need that be a showstopper? Will the Economic Secretary answer that question before we conclude the debate?
Mr. Gauke: My hon. Friend raises a good point when he questions why a UK-resident company would list overseas. If it did so, it would have difficulty with potential investors, so there would, if anything, be commercial pressure to remain in the UK and to list on AIM or the London stock exchange. It would make little commercial sense to go elsewhere, because confidence in the company might be called into question, and if that were not the case, there would be no concern.
Mr. Francois: I thank my hon. Friend for making that important point. He had considerable experience as a commercial lawyer before coming to this place. Indeed, I understand that his wife has ongoing experience as a commercial lawyer, so no doubt they discussed the matter before our debate. Mrs. Gauke cropped up regularly in the Standing Committee and I am pleased to be making sure that she does so again today before we conclude our debates on the Bill.
Wherever the advice came from, my hon. Friend makes a good point. Given that a key condition—the first condition—of clause 106 is that a REIT company must be UK resident, it is likely in practice that in most cases it would register in the UK if it wanted to register on an alternative market rather than on a full listing. But even if it did not—even if it wanted to register on one of the other EU exchanges—will the Economic
Secretary tell us why that should be an absolute showstopper? Why should such a company not have REIT status?
We know from the Standing Committee proceedings that the Economic Secretary sees himself as something of a philosopher, so we would like a clear philosophical response on that point—[ Interruption.] My hon. Friend the Member for Fareham (Mr. Hoban) says that a clear response of any kind would be good. We shall see.
I respectfully remind the Economic Secretary of the British Property Federation’s comments about clause 106, which highlight the listing requirements as the major problem in its provisions. The BPF briefing note argued:
“In summary therefore, our main concern with Clause 106 as it is written is that while it is likely that a number of existing listed property companies will convert to the new REIT regime, the provisions do not cater for the growth and enhancement of this market which will in turn bring forward investment benefits and opportunities to improve the quantity and quality of property investment in under-invested markets. In short, by so restricting the REIT regime to only ‘recognised stock exchange’ listed vehicles the government may inadvertently smother the ability of the market to develop.”
Ed Balls: Will the hon. Gentleman give way?
Mr. Francois: Certainly. I have a question to ask the Economic Secretary in return.
Ed Balls: I am grateful to the hon. Gentleman. I was studying websites and I found that the shadow Secretary of State for Environment, Food and Rural Affairs, the hon. Member for East Surrey (Mr. Ainsworth), has publicly announced that the current level of new house building is excessive. Does the hon. Member for Rayleigh (Mr. Francois) think that his hon. Friend will support his desire for a wider role for the residential property industry in REITs, or might the hon. Member for East Surrey be inclined to oppose the comments that the hon. Member for Rayleigh is making today?
Mr. Francois: I thank the Economic Secretary for that intervention, and I have two points to make in reply. First, under the principles of collective responsibility, I am sure that my hon. Friend will support the approach I am taking. Secondly, I do not want the Economic Secretary to think that he is the only person who can do a bit of research. I was researching in The Independent this morning, and I saw a wonderful heading:
“Revealed: Secret Tory past of Brown babe Balls”.
The story reveals that while he was at Oxford university, the Economic Secretary was a member of the Oxford University Conservative Association.
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Madam Deputy Speaker (Sylvia Heal): Order. I fail to see how this relates to the amendment under discussion.
Mr. Francois: It does not, of course. But my point is simply to demonstrate to the Economic Secretary that I, too, can do a bit of research. Also, when he sums up, can he answer this one question: when did the Chancellor know?
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