Previous Section Index Home Page

Given the way in which the self-invested personal pension scheme was put forward and then withdrawn, it is important that we allow these regulations to go ahead as was suggested in the consultation with the industry, which was very constructive, and let them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
5 July 2006 : Column 901
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.
5 July 2006 : Column 902
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


5 July 2006 : Column 903

a REIT structure. The paper went on to say:

the private rented sector—

It continued:

Finally, it stated that the Government were keen for a REIT

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:

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:

I suspect that he meant me—

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:

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

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:


5 July 2006 : Column 904

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
5 July 2006 : Column 905
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

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:

He continued:

Rob Marris: He said that?


5 July 2006 : Column 906

Mr. Newmark: Yes, he did.

As the Royal Institution of Chartered Surveyors has said:

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:

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:


5 July 2006 : Column 907

The Economic Secretary never answered that. My hon. Friend continued:

my hon. Friend made that point again earlier today—

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

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

I agree with that.

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:


5 July 2006 : Column 908

an important question—

The response, given by the right hon. Member for Bolton, West (Ruth Kelly), said:

this is the important part—

5.30 pm

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:

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

However, my right hon. Friend the Member for North-West Hampshire has said:

He also said:

Dave Ramsden, of Her Majesty’s Treasury, said:


5 July 2006 : Column 909

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:

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:

The National Association of Real Estate Investment Trusts said:


5 July 2006 : Column 910

not necessarily all—

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.


Next Section Index Home Page