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Given the way in which the self-invested personal pension scheme was put forward and then withdrawn, it is important that we allow these regulations to go ahead as was suggested in the consultation with the industry, which was very constructive, and let them bed down. At that point, we can look at where the imbalances are, and at ways to overcome them. That is when we should reflect on whether the proposals in amendment No. 130 are required or appropriate. The Liberal Democrats are relaxed about this issue. We would rather see how the REITs regulations bed down over the first couple of years, and how the companies in question bed down in the London stock exchange, and then, if there is a problem, look to AIM.
Stewart Hosie (Dundee, East) (SNP): I wish to address my remarks to amendments Nos. 64 to 68. The substantive amendment is amendment No. 65; the others are consequential, renumbering subsections in clause 106.
The Minister and
others will know that I and my party are very supportive of the concept
of real estate investment trusts. Like many, we believe that they offer
a route into property investment for the vast majority of people, who
do not have the means to purchase a second property outright, or for
those who do have the means but who simply wish to avoid managing such
properties themselves. We also believe that if REITs are local and
highly focused residential trusts, they have the opportunity either to
complement the existing local authority sector or housing association
and private
residential rented sector, or to provide additional
rented properties in areas where there is little provision, or none at
all.
However, the legislation as it stands will force all REITs to be listed on the stock exchange. We believe that that requirement alone might prevent the creation of the smaller, local, highly focused residential trusts that we would like to be created, along with the inevitable larger commercial ones.
As we know, the minimum entry level for a stock exchange listing is £750,000, plus another £750,000 for fundraising, plus 2 to 5 per cent. in commission, and advisory costs of some £250,000. Fundraising on the stock exchange can be for any amount. We also know that the typical value of a stock exchange-listed company is £100 million upwards. If one combines those costs with the other rules—that 75 per cent. of a REIT’s commercial activity must come from rentals, and that 90 per cent. of the rental income must be returned in dividends to investors—there is a very real danger, to which the hon. Member for Rayleigh (Mr. Francois) alluded, that REITs will focus solely on high-end commercial and retail properties that already offer a guaranteed high rental income. It is also likely that, to cover the listing costs and to meet all the other rules and obligations, such trusts will purchase property rather than seek to develop it.
Our view is that to encourage smaller, more focused residential trusts to deliver rented housing, the entry bar should be far lower than the stock exchange listing requirement in current legislation. For example, the minimum entry cost for introduction to the alternative investment market is about £300,000. Fundraising accounts for another £300,000, and there are similar commission levels of 2 to 5 per cent.; however, the ongoing advisory costs—some £50,000—are far less than the £250,000 figure.
In AIM, companies tend to be in the £10 million to £150 million range, with fundraising costs in the region of £2 million £20 million—the kind of figure that a small, locally focused residential trust might seek to raise. Further down the range is the off-exchange market, with a minimum entry figure of £30,000, fundraising costs of about £100,000 and similar commission levels, but with ongoing advisory costs of some £10,000. Ofex caters for businesses up to the £20 million mark—not a tiny sum—whose fundraising costs are in the £300,000 to £4 million range. Of course, there is also the opportunity for any business or trust to be financed privately.
So, given the
other conditions applying to REITs—not least the residency
qualification—there seems little logic in forcing a REIT to be
quoted on the official list; indeed, in the light of the associated
costs and the typical size of businesses on the list, there is almost a
disincentive for local residential trusts to be created. Our amendments
would eliminate that requirement from the Bill by deleting subsection
(5) from clause 106, thereby removing the condition that a trust
company’s ordinary shares be listed on the stock exchange. The
only argument previously posited in favour of full listing is that it
would perhaps give confidence to investors and to those seeking to rent
a property from such a trust.
However, a given individual or business will take the decision to invest
or rent after applying the correct degree of scrutiny and due
diligence.
Although a full listing indicates a large company with deep pockets, a small, privately funded trust—or one whose shares are traded in AIM or Ofex—could prove to have better local knowledge, equally experienced management and excellent internal management systems. In short, there should be no assumption that a stock exchange listed company is always a better option than one that is not listed.
The key point is that although I welcome the creation of the REIT regime, the Government should not limit the creation of highly focused local residential trusts through the mechanism of a stock exchange entry and its associated fundraising costs. We have great hopes that REITs will complement the existing social and for-profit rented sector, but that opportunity would be enhanced by a more liberal approach to the regime’s operation from the outset. I suspect that the Government have some sympathy with that argument.
We want a commitment from the Government that they will move as quickly as possible to liberalise the REITs regime, in order to ensure that the hoped-for benefits in the residential sector are brought to fruition, and that REITs do not simply become players in the high-end commercial property market. I hope that, when the Minister sums up, he can guarantee, or at least hint at, the fairly speedy liberalisation of the market. Should that not be forthcoming, we will—should you allow us, Madam Deputy Speaker—press one of our amendments to a vote.
Sir George Young (North-West Hampshire) (Con): I commend my hon. Friend the Member for Rayleigh (Mr. Francois) on his eloquent advocacy of amendment No. 130. I was delighted to hear that his arguments have struck a cord in other parts of the House. I agree with what the hon. Member for Dundee, East (Stewart Hosie) said towards the end of his remarks about getting a healthy residential market on its feet.
I want to speak briefly to amendments Nos. 60 and 61, and I refer again to my entry in the Register of Members’ Interests. Although it is not a registrable interest, I was also a member of the Oxford University Conservative Association, although the impact that I made may have faded by the time the Economic Secretary signed up a few years later. This is the fourth and penultimate time that I will speak in the Finance Bill proceedings on real estate investment trusts. Let me summarise where we are. There is a background of an all-party consensus on the need for a new investment vehicle to promote investment in residential property, attracting long-term institutional funds, broadening the market, giving a wider choice for those who want to rent and enabling private and institutional investors to get exposure to the residential property market that they do not have at the moment.
When the Government came into office, there was an all-party consensus that we needed an initiative. The Government took the debate forward and I give them credit for that. We had the Kate Barker report and then, in March 2004, the Treasury consultation paper. In paragraph 1.14, it said that a REIT
“structure in the UK would therefore set a challenge for the industry to encourage development of new housing, which could...be managed within”
a REIT structure. The paper went on to say:
“Improvements and expansion to this sector”—
“could enhance efficiency and flexibility in the housing market.”
“The Government is keen to encourage greater renewal in the property sector, and the development of new...residential buildings”.
Finally, it stated that the Government were keen for a REIT
“to stimulate greater development activity in the residential market providing a vehicle into which new properties can be converted and managed more efficiently.”
There is no disagreement on either side of the House about those objectives. The debate in Committee was about whether those objectives would be achieved with the regime that is before us. We had a constructive and, by and large, consensual debate. We established that there was domestic harmony between the Economic Secretary and the Minister for Housing and Planning on the approach to REITs and that the framework for our debate was what the Chancellor said in his Budget speech:
“To attract more capital into house building, we are now legislating to introduce for Britain the real estate investment trusts that are so successful in the USA.”—[ Official Report, 22 March 2006; Vol. 444, c. 293.]
I want to bring one or two points from the debate to the attention of the House. The Economic Secretary was asked what went wrong with the previous initiatives and he replied:
“He”—
“will probably agree that the regime did not work; in our view, it was too prescriptive and insufficiently flexible and thus did not attract capital.”
There is some concern that the new regime may have the disadvantages of the regime that he criticised in that debate. He went on to say:
“We are trying to deliver a regime that will be more flexible and more appropriate for residential property investors.”
I will come to that in a moment.
The debate spanned a morning sitting and, as my hon. Friend the Member for Rayleigh said, a rather warm afternoon sitting. Again, I want to pick up on some of the key points of that debate. The Economic Secretary said that he fully supported the
“objective of encouraging further investment in residential property.”
We probably pushed him right to the limits of his negotiating powers by extracting from him a general undertaking that if things did not go as he hoped, he would have another look at the matter. He did not go quite as far as we all wanted, but at the end I withdrew the relevant amendment, saying:
“The Minister is a reasonable man, and he went as far as I suspect his brief allows him to go in giving the undertaking. Without prejudice to the possibility of bringing back on Report a related amendment...I beg to ask leave to withdraw the amendment.”—[ Official Report, Standing Committee A, 8 June 2006; c. 479, 503, 509.]
I remind the House that there is enormous potential here. I understand that there is a proposition to build the Olympic village through a REIT. There is also the possibility of using REITs to provide student accommodation and other opportunities. However, the key question is whether we will have the correct regime. My amendments Nos. 60 and 61 approach the problem from a slightly different angle from the one that I moved in Committee. They would amend clause 112, which introduces the entry charge, or conversion charge, which is the entry tax that one must pay if one wishes to become a residential REIT.
5.15 pm
It is worth bringing to the House’s attention the fact that the entry charge, or conversion charge, was not a feature of the regime initially proposed by Kate Barker, who focused on residential REITs. The conversion charge came on to the radar when the concept was extended from residential REITs to commercial REITs. By converting to a REIT, a quoted company will avoid capital gains tax liabilities, so to defray any possible loss of revenue, the Government decided to introduce a conversion charge to compensate the Treasury for the prospective loss of finance. I have no difficulty with that as a concept. In my view, the charge was set at a generous level, and the Minister explained how it was calculated. When the announcement was made, the market was pleasantly surprised.
Although a conversion charge might be appropriate for a commercial REIT, I argue that it is wholly inappropriate for a residential REIT. We have established that no quoted residential property company is likely to convert, so a residential REIT will have to start from scratch. In an earlier intervention, the Economic Secretary referred to 17 housing associations that are forming a consortium with a possible view to converting to a REIT. If one examines the model that that consortium will have to follow, there are severe disincentives to adopting the REIT structure.
The first thing that will happen when a housing association wants to put its residential properties into a residential REIT is that it will have to pay capital gains tax on any profit from the disposal of those properties. That will crystallise a capital gains tax liability that would not have been there otherwise. Capital gains tax will have to be paid on any properties transferred from the existing portfolio to a residential REIT. Secondly, stamp duty at 4 per cent. will be payable by the REIT vehicle on purchase, and, thirdly, the REIT will have to pay a 2 per cent. charge on conversion. Those are serious disincentives before any new supply is created. If the objective is to establish a more benign fiscal regime, it is absurd to start by expecting a residential REIT to pay three taxes that it would not have to pay at the moment.
I shall
outline what has gone wrong. The original regime was aimed at
residential REITs, but that has been transferred to cope with
commercial REITs, so that regime is simply inappropriate. The Economic
Secretary is frowning, but those three taxes—capital gains tax,
stamp duty and the conversion charge—will be payable before a
residential REIT gets into the business of providing new homes, which
is the object of the exercise. In a sense, the commercial property
companies have become the cuckoo in the nest. The
nest was originally designed for residential REITs, but the cuckoo has
come along and displaced the original occupant—the residential
REIT. Unless the Minister makes a concession today or at a later stage,
I am worried that the hurdles that will
confront— [Interruption.] I will happily give way if the
Minister is about to indicate that he will accept my amendments, or
indeed waive some of the taxes to which I
referred.
Ed Balls: Is the right hon. Gentleman really saying that the British commercial property sector, which is renowned nationally and internationally for its efficiency and strength, is a cuckoo?
Sir George Young: I am slightly sorry that the Minister has taken so seriously the analogy that I was trying to convey to the House. In Committee he displayed traces of humour, which we enjoyed. I am sorry that that is the best response that he can produce to the rather serious case that I was making, which is that the regime—or the nest, if he does not find that reference offensive—most appropriate for the commercial sector is not appropriate for the residential sector. There is an offshore alternative to UK REITs, which the Treasury should not ignore.
I hope that the Economic Secretary will reflect on the fact that there are some serious hurdles to overcome before the residential REIT gets going. I also hope that, when he winds up the debate he will exhibit some flexibility—and possibly some humour—in his response to my case, which I have made against the background of the model that will be used by the very housing associations that he mentioned earlier.
Mr. Newmark: I, too, would like draw attention to my entry in the Register of Members’ Interests. In common with my right hon. Friend the Member for North-West Hampshire (Sir George Young) and the Economic Secretary, I was also a member of the Oxford University Conservative Association. I hope that hon. Members will forgive me for not registering that interest before.
The objectives are quite simple—they are first, to stimulate an onshore REIT market, and secondly, to achieve the Government’s and the Chancellor’s aim of having a REIT market that stimulates residential housing. Those are the two aims that we want to achieve.
When I read that Paul Herrington, head of UK property investment at Foreign and Colonial, believes that the Chancellor’s proposals for REITs are welcome, it has to be a good thing. He thinks that the proposals
“confirm property’s position as the main alternative asset class to equities and bonds”
and that changes need to be made to the Finance Bill. He recognised REITs’ importance as an alternative asset class and went on to argue:
“There are other types of property investment vehicles that are currently outside the Reit regime. These include offshore investment trusts, limited partnerships and some very successful companies listed on Aim, which are likely to stay outside of it under currently proposed rules”.
“By excluding Aim, we might end up with a two-tier market like a Premier League and a Division One.”
Rob Marris: He said that?
Mr. Newmark: Yes, he did.
As the Royal Institution of Chartered Surveyors has said:
“A successful REIT market should have both listed and unlisted vehicles in order both to allow maximum choice to investors of differing experience and size and also to provide a pooling facility for smaller REITs to develop outside a listed market until such time as they are ready and able to go public—this should be particularly helpful to smaller players in the market.”
Mr. Colin Breed (South-East Cornwall) (LD): Does the hon. Gentleman think that having smaller REITs may enable more local and regionalised funds to be brought into play? Many people feel that they would like to help particular geographical areas, rather than necessarily contributing to the national pot. The smaller ones, operating on a regional and local basis, can be very attractive.
Mr. Newmark: The hon. Gentleman makes an excellent point. We discussed in earlier debates how to stimulate housing, but not just in the south-east where there are enormous stresses and strains. My hon. Friend the Member for East Surrey (Mr. Ainsworth) alludes on his website to the fact that there is already far too much house building in the south-east. If we want to stimulate such building out in the regions—I see that I have finally got the attention of the Economic Secretary—I suggest that we follow Schumpeter’s principle that small is beautiful. If we want to encourage regional housing developments that tend to be smaller, the particular residential housing required is more likely to be of the right size to be on AIM, but not to have the wherewithal, facility or finances to list on a fully listed stock exchange.
The then Economic Secretary repeated a commitment in Committee of the whole House:
“We are willing to consider any consequence of market developments...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.”—[ Official Report, 3 May 2006; Vol. 445, c. 1041.]
I would be interested to know whether the current Economic Secretary is still willing to be open minded about the matter. Perhaps he would like to intervene? I guess not. As AIM listing will have no adverse impact on the Exchequer—I recognise that the Economic Secretary and the Chancellor are concerned about that—will the Economic Secretary give a commitment at least to review the listing requirement in response to the lack of expected take-up from the residential property sector? That is all we ask. We want the Economic Secretary to be open minded and watch how the market develops. If the Government are not achieving their aims of stimulating the residential, not simply the commercial side, for REITs, we ask them at least to take an open-minded approach.
It is worth considering the comments of my hon. Friend the Member for Rayleigh (Mr. Francois) in Committee, when he gave a good analysis of the benefits of AIM. I must quote his thorough analysis in full. He stated:
“AIM-listed companies already provide a legitimate form of collective investment, so why have the Government decided to exclude them from the REIT regime from the start?”
The Economic Secretary never answered that. My hon. Friend continued:
“On a practical level, property companies that are registered as REITs are likely to enjoy significant tax advantages over those—usually smaller—companies that are denied the advantages that REIT status confers. There could therefore be considerable consolidation in the market as REITs take over other property companies such as those on AIM”—
my hon. Friend made that point again earlier today—
“which cannot qualify for REIT status. That is potentially unfair”.
I know that the Economic Secretary views fairness as an important criterion when considering such matters.
My hon. Friend continued by saying that, over time, that inability to qualify
“could mean that the UK property market was increasingly dominated by a relatively small number of large REIT companies. I presume that the Government did not intend that. We would move in the direction of an oligopolistic market and I am not sure that Ministers want that.
Moreover, AIM-listed companies might come under pressure to convert to a full stock exchange listing before they were ready for it, principally to qualify for REIT status, thus potentially causing a distortion in the orderly evolution of the market sector. Why not, therefore, expand the condition to cover at least AIM-listed companies”?
My hon. Friend makes that point time and again. He was dogged—indeed, almost terrier-like—about it. He continued by saying that expanding the condition would
“thus facilitate greater diversity in the REITs market available to investors... There is a strong common-sense argument for doing that.”—[ Official Report, 3 May 2006; Vol. 445, c.1026.]
Madam Deputy Speaker: Order. The hon. Member should finish with the quotation.
Mr. Newmark: Your timing was perfect, Madam Deputy Speaker, because I had just finished the quote.
The Government appear to be worried about the regulatory position, but AIM is not unregulated and it does not lack the transparency that the Government seek, for once, to encourage.
Madam Deputy Speaker: Order. I believe that I said that that was sufficient of the quotation, or has the hon. Gentleman completed it?
Mr. Newmark: To clarify, Madam Deputy Speaker, I was previously talking about my hon. Friend’s analysis of AIM and I am now moving on to the regulatory regime.
AIM does not stipulate minimum criteria for company size, track record or the number of shares required to be in public hands. The Government gave a parliamentary answer in response to queries about AIM’s regulatory position. In November 2003, the right hon. Member for Coatbridge, Chryston and Bellshill (Mr. Clarke) tabled a written question:
“To ask the Chancellor of the Exchequer...what discussions he has had with the (a) London Stock Exchange and (b) Financial Services Authority on the alternative investment market becoming an unregulated market...what research he has carried out on the way in which an unregulated alternative investment market would affect companies and investors”—
“and what discussions he has had with the European Commission about the alternative investment market becoming an unregulated market.”
The response, given by the right hon. Member for Bolton, West (Ruth Kelly), said:
“The London Stock Exchange...is a Recognised Investment Exchange...under the Financial Services and Markets Act...and”—
“has to operate all its markets, including the Alternative Investment Market (AIM), in compliance with the recognition requirements for REITs. The Financial Services Authority...supervises its compliance with these obligations...Because AIM is not going to become an unregulated market, the Treasury has not done any research about the impact of such a scenario on investors and issuers, nor have we discussed it with the European Commission.”—[ Official Report, 4 November 2003; Vol. 412, c. 624-25W.]
Let us come to the important issue, which is the housing requirements that the Chancellor, the Economic Secretary and, I assume, the Paymaster General are seeking. The Chancellor, as we have heard, said in this year’s Budget speech:
“To attract more capital into house building, we are now legislating to introduce for Britain the real estate investment trusts that are so successful in the USA.”—[ Official Report, 22 March 2006; Vol. 444, c. 293.]
So, we hear two things now. We hear that the Chancellor is looking to the US as an excellent example of successful REITs, and he is looking at REITs as a way of stimulating the housing market. However, we have heard today that the main emphasis with REITs seems to be on stimulating the commercial side of the market rather than the residential side. The success of REITs in the USA is arguably because there is no listing requirement at all, which the Chancellor does not seem to have acknowledged. The important point is that without such a requirement smaller, more flexible residential property companies, would be allowed to participate.
What do the Government really intend REITs to achieve? All the evidence points to the death of the original concept of stimulating investment in the residential property market. The hon. Member for Bury, South (Mr. Lewis), when he was Economic Secretary, said that
“one of the aims of introducing UK-REITs is to improve efficiency, affordability and professionalism in the private rented sector to the benefit of residential tenants.”—[ Official Report, 13 February 2006; Vol. 442, c. 1556W.]
However, my right hon. Friend the Member for North-West Hampshire has said:
“When the concept was originally considered, there was concern that it should not simply be a new vehicle for existing property companies. Consideration was given to a requirement that, in order to qualify for a REIT, one would have to add to supply.”
“Housing hardly gets a mention in the post-Budget comment on REITs.”—[ Official Report, 24 April 2006; Vol. 445, c. 422-23.]
Dave Ramsden, of Her Majesty’s Treasury, said:
“We would expect that REITs in the version we have ended up with—REIT UK, if copyright allows us to call them that but that is another story—are more likely to encourage flexible investment in commercial property. That is clear from the consultation. It does not mean that we will not get some residential property, I think we will get some but it is not going to be the main focus of the REIT.”
That is the point that we continue to make: REITs are stimulating not the residential housing market, but the commercial property market.
The debate over listing, however, consists of two main points. The argument for public listing—this is an important point that the Government make—is that it would subject companies to the appropriate listing authority rules regarding investor base, disclosure and market scrutiny, and would therefore help to ensure suitability for a wider retail investor base.
Dawn Primarolo: We have heard the hon. Gentleman recite what his hon. Friends think is important. We have heard him recite what the Government think is important. We have heard him recite also what Mr. Dave Ramsden thinks is important. When will the hon. Gentleman get around to telling us what he thinks is important and what the point of his speech is?
Mr. Newmark: The right hon. Lady must be patient. I am reaching my peroration, but not quite yet.
The arguments against listing involve allowing a company to develop initially as an unlisted UK REIT potentially to increase the size and scope of the market, of which we have heard much already.
Ed Balls: My right hon. Friend was most unfair to the hon. Gentleman. He made an important point a few moments ago. He said that in his view there is far too much house building in the south-east. That is the point of his speech, and we have all taken it on board.
Mr. Newmark: That is an interesting interpretation of what I did not say.
Ed Balls: I wrote it down.
Mr. Newmark: I think that I will ignore the hon. Gentleman’s interjection. The hon. Gentleman says that he wrote it down, but he obviously was not paying attention.
Lee Nuttall, who is a real estate tax partner at Wragge & Co., said:
“It should be immaterial whether the investment comes from a private REIT or from a REIT recognised by the Stock Exchange. The expense of obtaining and maintaining a Stock Exchange listing will have an adverse impact on investor returns...It would be easy for the Government to squander this opportunity through over-regulation and a failure to listen.”
We criticise the Government for a lack of listening. Even the Financial Services Authority’s implementation of the transparency directive on investment entity listing review in March 2006 said:
“A successful REITS market should have both listed and unlisted vehicles in order both to allow maximum choice to investors of differing experience and size and also to provide a pooling facility for smaller REITS to develop outside a listed market until such time as they are ready and able to go public. This should be particularly helpful for smaller players in the market.”
The National Association of Real Estate Investment Trusts said:
“While we anticipate that a good number”—
“of currently listed property investment companies will convert to UK-REIT status, we expect further companies to list for the first time in order to qualify under these tax rules. As a result, these proposals will have a significant impact in this area.”
We have heard—it was an important point that my hon. Friend the Member for Rayleigh raised—that about 190 are publicly traded REITs in the USA, with assets totalling more than $475 billion. The shares of those companies are traded on major stock exchanges, which sets them apart from traditional real estate. Other REITs may be publicly registered, but non-exchange traded or even private companies. About 800 REITs are not registered with the Securities and Exchange Commission and do not trade on any stock exchange. Yet, as we have heard, the US is an extremely successful market. Even the Chancellor of the Exchequer, as we have heard, looks to the US as an example of where a successful REIT market has been developed, and one that we should emulate.
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