Clause
51
Real
Estate Investment
Trusts
Question
proposed, That the clause stand part of the
Bill.
Ed
Balls:
With your permission, Mr. Illsley, it
might be possible to discuss our amendments to schedule 17 while we
debate clause 51, as it introduces the schedule. I will be guided by
you.
Mr.
Mark Francois (Rayleigh) (Con): For procedural reasons
that will become apparent, I would rather do clause 51 first and then
come on to the amendments.
The
Chairman:
We will start with clause stand part and
take it piece by piece.
Mr.
Francois:
I hope my reasons will become apparent, and I
welcome you to the Chair, Mr. Illsley.
Last year, during the Finance
Bill, I debated with the Economic Secretary the introduction of the new
regime of real estate investment trusts, which subsequently went live
in the United Kingdom on 1 January 2007. Since that time, the
Government have had the opportunity to consider the initial operation
of the scheme. Via clause 51 and the associated schedule 17, they have
introduced what might be characterised as a number of tweaks to the
regime, designed to improve its operation. Unfortunately, some
important issues have still not been addressed.
Clause 51, which introduces the
schedule, allows some of the changes contained therein to be backdated
to the introduction of the introduction of the REIT regime on 1
January. Moreover, the changes proposed in schedule 17 include relaxing
some of the qualifying conditions that must be met in order to achieve
REIT status. That the Government are still tweaking the REIT regime is
evidenced by the fact that schedule 17 is now being amended by 20
Government amendments—amendments Nos. 138 to 158—which in
practice all relate to demergers and are largely corrective. In other
words, they represent a further tweaking of the tweak.
I have relatively little to say
about the Government’s drafting amendments to schedule 17, aside
from an important procedural point that I shall come to when we get
there. However, I want to give you notice, Mr. Illsley, that
when we come to schedule 17 stand part, I want to raise several points
about the schedule and how it effects the REIT regime to date and in
the future.
Question put and agreed
to.
Clause
51
ordered to stand part of the
Bill.
Schedule
17
Real
Estate Investment
Trusts
Ed
Balls:
I beg to move amendment No. 138, in
schedule 17,
page 214, line 11, leave out
‘transfers’ and insert ‘disposes
of’.
The
Chairman:
With this it will be convenient to discuss
Government amendments Nos. 139 to
158.
Ed
Balls:
I shall be brief because it is clear that the hon.
Gentleman does not intend to raise detailed issues about the
amendments. It is for you to make a judgment, Mr. Illsley,
but from my point of view it would be fine if we range
widely.
The clause
that we have just agreed to introduces schedule 17, which amends
provisions in part 4 of the Finance Act 2006. As the hon. Gentleman
reminded us, we debated that set of clauses in great detail a year ago
in a spirit of co-operation, and we made progress in mutual
understanding of some of the
issues.
The regime
came into force on 1 January after some years of detailed and
constructive consultation and engagement with the industry. By allowing
indirect investment in property to enjoy the same tax treatment as
direct investment, the UK REIT regime will improve the quality and
quantity of finance for investment in property, promoting a wider range
of savings products for individual investors and supporting structural
change in property markets
I am pleased to say that the UK
REIT regime is already proving a success with 13 companies converting
to the regime from a wide variety of sectors, and now a 14th company
setting up with the express purpose of being a UK REIT. The total
market capitalisation of the UK REIT sector is now £35 billion,
and two of the UK REITs include both commercial and residential
property in their
portfolios.
Since last
year’s Finance Bill, we have continued our consultation with the
industry to ensure that the regime works as effectively as possible.
The changes in the schedule are the result of that consultation and
were announced at the time of the pre-Budget report. As the hon.
Gentleman suggested, they are minor changes clarifying some of the
definitions and powers in the existing
legislation.
We also
announced at the time of the pre-Budget report that we would introduce
changes to the regulations to extend the regime to make it easier for
companies to become UK REITs, and the Chief Secretary circulated draft
regulations for that purpose to Committee members on 9
May.
Since publication
of the draft clause and schedule at the end of March, the Law Society
has come forward with a further representation on the technical detail
of the regime as it relates to demergers from UK REITs. Continuing that
spirit of consultation, we are keen to accommodate those points, hence
the amendments.
I am
happy to respond to questions or requests for clarification, although I
have the impression from remarks by the hon. Gentleman on the previous
clause that he accepts that these are minor, technical drafting
amendments.
Mr.
Francois:
It is entirely up to the Economic Secretary to
decide how to play this, but I prefer briefly to debate the amendments
first, and then to move on to schedule stand part, but I am in your
hands, Mr.
Illsley.
Ed
Balls:
Given that the hon. Gentleman made some
introductory remarks about the REIT regime, I was making some
introductory remarks about it, too, and the changes that we are making
in the schedule. It is for him to decide how he frames the debate, but
I thought it would be helpful for me to put on the record for hon.
Members the context within which his detailed points
occur.
As
I understand it, his detailed points do not concern the amendments, but
given that the amendments are to the schedule and that they and the
wider context cannot be understood without understanding the schedule,
I thought it would be helpful to make a few remarks about the schedule.
However, I shall be guided by you, Mr.
Illsley.
The
Chairman:
We are discussing the amendments, and if the
hon. Member for Rayleigh then wants a stand part debate on the
schedule, the whole aspect of it can be debated then. He can speak just
to the amendments at this
stage.
Ed
Balls:
Then I am very happy to sit down now and wait until
the schedule stand part
debate.
Mr.
Francois:
We got there in the end. As I said in my
remarks on clause 51, these amendments are essentially drafting in
nature. They modify the elements of the schedules specifically relating
to demergers. As such we have no quarrel with them and I have only one
specific question to put to the Minister about them. However, there is
a procedural point which I do not want to let pass without comment. I
raise it more in sorrow than in anger because last year we debated
REITs in a rather consensual manner and managed to cover a lot of the
detail as a result.
We have already had one
occasion in Committee when Ministers were taken to task because details
of draft Government regulations had been circulated in advance to
selected members of the Committee but unfortunately not to others.
After that, as I recall, Ministers, including the Chief Secretary,
apologised to the Committee and said that they would do their best to
prevent that sort of thing from happening again. However, when I
returned to my office this lunchtime, newly arrived in my e-mail inbox
was an electronic copy of a letter dated 16 May from the Economic
Secretary to my hon. Friend the Member for Chipping Barnet. According
to the electronic copy, there was a hard copy for the hon. Member for
Falmouth and Camborne, the Chairman and Clerk of the Committee, but to
no one else. Among other amendments, it refers to the REITs amendments,
which we are debating this afternoon, and it was the first time that I
had seen or heard of that letter.
If Ministers are going to write
to members of the Committee explaining the reasoning behind their
amendments, which is a laudable aim and quite often the right thing to
do, could they please try harder to ensure that they circulate the
information to everyone
on the Committee—Back Benchers and Front Benchers—as
simple courtesy would suggest? As this has already happened once on
this Committee, I hope that we will not get a hat trick. I make a plea
through you, Mr. Illsley, that Ministers do their best to
take this point on board. If the Minister wishes to intervene, I will
sit down, but I still have a question for
him.
Ed
Balls:
I conducted the Finance Bill on the REITs clauses.
I remember us having a substantive consensual discussion, with some
areas on which there was disagreement. As I understand it, we have
operated this year in exactly the same way as in previous years in
ensuring the circulation of letters and amendments to members of the
Committee. I am happy to be corrected by the hon. Gentleman if there
has been a change in our procedure. As I understand it, we have done
things in the same way as in previous years when no difficulty arose at
all.
I do not know
whether there is a problem because once again the circulation has not
been carried out by the Committee Clerks or the hon. Member for
Chipping Barnet has not circulated it to her colleagues. The hon.
Gentleman said that he was making his point more in sorrow than in
anger. If he suggests that there has been a procedural mistake, it
would be helpful to us if he specified what we have done differently
this year from last year so that we can rectify
it.
The
Chairman:
Order. To clarify matters for the Committee, as
far as the Chair and the Clerks are concerned, any correspondence from
a Minister to members of the Committee should go to every member of the
Committee. That is the limit of the Chair’s involvement. It is a
matter for the Government and members of the
Committee.
Mr.
Francois:
I am grateful for that clarification,
Mr. Illsley. I do not think that we want to do this to
death, but as I understand it, it is not the responsibility of the
Clerks to ensure that members of the Committee get correspondence from
the Minister; it is the Minister’s responsibility. I hope that
this will not happen again and that we can move
on.
Ed
Balls:
Will the hon. Gentleman give
way?
Mr.
Francois:
I will, but the Minister has heard the
Chairman’s ruling. I know that he is new to this game, but he
would be wise to listen to
it.
6.30
pm
Ed
Balls:
As the hon. Gentleman said, last year we went about
these matters in a very different way from the way that he is choosing
to go about them this year. I should like to understand what accusation
he is making. Is he suggesting that we have changed the way we do
things this year compared with last year? If so, is he saying that it
was done in order to prevent him from having sight of the regulations?
If that is the accusation, I refute it entirely, and am upset by the
insinuation that he is
making.
Mr.
Francois:
As I said, we will not do this to
death.
Ed
Balls:
We have done it to death
already.
Mr.
Francois:
I am not accusing the Minister of not letting me
see the regulations—they are amendments, not regulations. I am
saying that he wrote to some Committee members explaining the rationale
behind those amendments, but not to others. My understanding is that,
normally, when a Minister does that, he should write to all Committee
members. He cannot just e-mail one or two and expect them to circulate
it on his behalf. That is my understanding; I think that you have
confirmed from the Chair, Mr. Illsley, that, as a rule of
thumb, if a Minister writes to one Committee member with information
relevant to a debate, he should write to everybody.
So that the Minister
understands me, let me say that I behaved as I did simply because this
has happened once already in the Committee and we were told, in
essence, that it would not happen again. It has happened a second time,
so I did what I did. I hope that he understands that and that it will
not happen a third time. I hope that the lesson can be learned. With
that, I would like to ask the Minister about the amendments, which I
believe, he is here to answer. Amendment No. 138 replaces the word
“transfers” with the words “disposes of” an
asset—others make similar provisions. For clarity, will the
Minister explain the technical reasoning behind that change in
drafting?
Ed
Balls:
I am happy to explain the thinking behind all the
amendments. As I said, we put the amendments out to consultation, and
since their publication, the Law Society has made further
representations on the technical details of the regime for demergers
from UK REITs. The Government amendments will ensure that schedule 17
provisions relating to demergers within UK REITs apply where a demerged
property or subsidiary is transferred to a new company that then
becomes a UK REIT
itself.
The amendments
will ensure also that the terminology used to describe the demergers is
consistent with that used elsewhere in UK REITs legislation by using
the word “disposal” rather than
“transfers”. Amendment Nos. 138 to 148 will mean that the
provisions in paragraph 11 of schedule 17 will apply to a company that
acquires a subsidiary company to which the ring-fenced assets have been
transferred. The amendments allow also the company time to satisfy the
conditions for entry to the UK REITs regime. That extends the same
flexibility to disposals of ring-fenced assets by a single company UK
REIT, as paragraph 16 proposes already for demergers from group UK
REITs. That accords with our policy of aligning the treatment of single
company and group UK REITs.
Amendments Nos. 149 to 158 will
mean that the provision in paragraph 16 of schedule 17 will apply where
a demerged company becomes a member of a new group UK REIT, rather
than, as originally provided for, a parent of such a group. In summary,
the amendments ensure that schedule 17 provisions relating to demergers
from UK REITs have their intended scope and include additional
flexibility. Just to be clear, amendments Nos. 138, 142, 146 and 147
substitute “disposal” for “transfer”, which
will mean that the terminology in that part of the Bill is
consistent with other sections of UK REITs legislation—for
instance, section 125(2) of the Finance Act 2006, which deals with the
movement of assets outside the ring fence, as well as chargeable gains
legislation.
Amendment
agreed
to.
Amendments
made:
No. 139, in schedule 17, page
214, line 13, after ‘S’ insert ‘to another
company
(“P”),’.
No.
140, in
schedule 17, page 214, line 14, leave
out ‘on the date of the transfer of the asset, S’ and
insert
‘on the date when
it acquires the interest in S,
P’.
No. 141, in
schedule 17, page 214, line 15, after
‘109’ insert
‘(as modified by paragraph 8 of
Schedule
17)’.
No. 142,
in
schedule 17, page 214, line 17, leave
out ‘transfer’and insert ‘disposal of the
asset’.
No.
143, in
schedule 17, page 214, line 18, leave
out ‘S’ and insert
‘the group of which S is a
member’.
No.
144, in
schedule 17, page 214, line 19, at
end insert—
‘( ) P may give
a notice under section 109 (as modified by paragraph 8 of Schedule 17)
in accordance with subsection (1)(c) even if it does not expect to
satisfy Conditions 3 to 6 of Section 106 throughout the accounting
period specified in the
notice.’.
No.
145, in
schedule 17, page 214, line 21, leave
out ‘S’ and insert
‘the group of which S
is a
member’.
No.
146, in
schedule 17, page 214, line 22, leave
out ‘transferred’ and insert ‘disposed
of’.
No. 147,
in
schedule 17, page 214, line 24, leave
out ‘transfer’ and insert
‘disposal’.
No.
148, in
schedule 17, page 214, line 25, at
end insert—
‘( ) But if, at
the end of the period of six months mentioned in subsection (1)(c),
Conditions 3 to 6 in section 106 are not satisfied in relation to P,
subsection (2) shall be treated as not having had
effect.’.
No.
149, in
schedule 17, page 215, line 13, after
‘group’ insert ‘(“Group
1”)’.
No.
150, in
schedule 17, page 215, line 16, leave
out ‘the group,’ and insert ‘Group
1,’.
No. 151,
in
schedule 17, page 215, line 19, leave
out ‘the principal company of a group’ and
insert
‘a member of
another group (“Group
2”)’.
No.
152, in
schedule 17, page 215, line 22, leave
out ‘it’ and insert
‘the company (or the principal
company of Group
2)’.
No. 153,
in
schedule 17, page 215, line 24, leave
out ‘the group,’ and insert ‘Group
1,’.
No. 154,
in
schedule 17, page 215, line 27, leave
out ‘the group.’ and insert ‘Group
1.’.
No. 155,
in
schedule 17, page 215, line 34, leave
out ‘the principal company’ and insert ‘a
member’.
No.
156, in
schedule 17, page 215, line 36, leave
out ‘the group.’ and insert ‘Group
1.’.
No. 157,
in
schedule 17, page 216, line 3, leave
out ‘the principal company’ and insert ‘a
member’.
No.
158, in
schedule 17, page 216, line 5, leave
out ‘the group.’ and insert ‘Group
1.’.—[Ed Balls.]
Question proposed, That
this schedule, as amended, be the Seventeenth schedule to the
Bill.
Mr.
Francois:
Schedule 17 contains a number of detailed
changes to the REITs regime, which began operation on 1 January 2007.
For instance, paragraph 2 of the schedule alters the definition of the
types of loans that REITs may undertake without breaching the regime,
and paragraph 3 modifies the restriction on income from owner-occupied
property that REITs are allowed to generate. We debated that last
subject in considerable detail last year, under what is now part 4 of
the Finance Act
2006.
Paragraph 5
amends section 109 of the Finance Act 2006, effectively allowing
certain previously non-listed companies to benefit from the REITs
regime. That relates specifically to close companies which technically
have difficulty in satisfying the requirements of the REITs regime on
their first day as listed companies. It is a modest relaxation of the
section 109 requirements, about which the British Property Federation
said:
“There is
currently a problem for new REITs at the time of listing and converting
to REIT status because there could be a very short period during the
first day of converting, when they were not actually
listed.”
The
Opposition welcome the changes so far as they go. However, even when
revised by the 20 Government amendments that have been tabled, the
changes proposed by the schedule still do not address two key issues on
the REITs regime that were highlighted to the Economic Secretary by the
Opposition a year
ago.
The first issue
is the continuing denial of REITs status to those companies listed on
the alternative investment market of the London stock
exchange—AIM, as it is more popularly known. According to recent
figures from the British Property Federation, some 14 companies with a
total market capitalisation of some £36 billion have converted
to UK REITs status since 1 January 2007. That figure looks impressive
at first glance, but it is important to note that approximately
£30.1 billion of that value—more than three
quarters—is represented by just five companies: Land Securities,
with £9.4 billion, British Land, with £7.8 billion,
Hammerson with £4.8 billion, Liberty International at
£4.5 billion, and SEGRO at £3.6 billion. In other words,
the regime has been dominated to date by the larger property companies,
which were always likely to convert to REIT
status.
The British
Property Federation argued in its May 2007 briefing, which lists the 14
REITs that have converted so far,
that:
“Whilst
this represents an encouraging start it should be noted that the above
list is almost entirely represented by those existing, listed property
companies that have always been viewed as best placed to convert to
REITs.”
The federation
goes on to
say:
“We have
concerns that, under the current legislative framework for UK-REITs the
medium/long-term growth of the UK-REIT market will be limited and that
actions need to be taken in the short term in order to address these
concerns.”
That
brings me to the issue of allowing REITs to be listed on AIM as well as
on the principal stock exchange. As the Economic Secretary will recall,
we debated that issue as well in considerable detail last
year, including on Report. So that it is not said that I have misquoted
him, let me say that he did not commit to launching a formal
review—he was clear about that, and I remember what he said. He
did, however, say that he would keep the issue broadly under review. I
hope that I have not misrepresented him. In light of that, is it still
Government policy that REIT status should be denied to property
companies that are listed on AIM, even at the risk of inhibiting the
potential growth of the UK REITs market? In other words, has the
Government’s position moved since last
year? The second
important issue that the changes to schedule 17 fail to address, and
which the Economic Secretary should likewise recall from last
year’s debates, is the lack of establishment of residential
property REITs. Those established so far have been almost entirely
commercial property REITs. On that point, the British Property
Federation
said:
“It is
noticeable that there is no material residential property within the
existing REIT regime. This is despite the fact that the development of
a tax efficient listed residential property market and the wider
benefits that this could bring to the UK economy was one of the key
policy objectives for introducing UK
REITs.
The UK
Government should actively seek to use the REIT structure as a tool to
encourage the growth of a listed residential sector. This will be
achieved by working with the industry to develop the REIT regime so
that it is more suitable for a residential business
model.”
When I
raised that issue with the Economic Secretary last year in Committee,
in advance of the launch of the new regime, he
said:
“Over the
course of this year and not just when the regime begins, we will be
monitoring closely whether residential companies enter the regime. I
explained that I was not surprised that early indications had come from
the commercial sector, because of its larger scale and sophistication,
but I also said that there had been private and public indications that
residential property companies would come
forward.”—[Official Report, Standing Committee A,
8 June 2006; c. 507.]
He then
committed to keep that matter as well under review during the year
ahead.
Almost a year
on, and now that the regime has been operating since January, will the
Economic Secretary explain to the Committee why, despite his
encouraging prediction a year ago, the REIT regime remains
overwhelmingly dominated by commercial property and hardly any
residential property companies have converted to REIT status? He
attempted to fudge it by saying that two REITs had both a commercial
and a residential property element, but a REIT can have a very small
residential property element and still meet that description. Have any
out-and-out residential REITs entered the regime? I ask because, if
part of the Government’s aim was to create a REIT regime to
foster the development of new residential housing, particularly
affordable housing, they appear to have failed thus far in that
important objective. I should like to press the Economic Secretary to
reply to those
points.
Stewart
Hosie (Dundee, East) (SNP): I mirror some of those
questions. Debate on Report last year was particularly heated about
allowing REITs to be created not simply with full stock exchange
listings but by other means of funding. I recall perfectly well that
throughout the process, the Economic Secretary said—I think that
it was in good faith—that he would
monitor the situation and keep it under review. I mirror the questions
asked, particularly in relation to small REITs providing social
housing. Many of us saw a great deal of potential in the tax benefits
of REITs that do not require the massive start-up costs of a full stock
exchange listing.
I
also have a question about schedule 17. Paragraph 7(b) deals with
section 116, “Minor or inadvertent breach”. Proposed new
subsection 3A(b)
states:
“The
regulations may make provision about, or by reference to, anything done
by or in relation to a company or any sum arising or treated as
arising...in the calendar year during which the regulations are
made”,
rather than the
financial year, tax year or accounting year. Why is the calendar year
specified?
Ed
Balls:
I shall investigate the matter brought before the
Committee earlier about the circulation of proposed amendments and I
shall happily give a full report in writing to you, Mr.
Illsley, and to all Committee members. If the Treasury, my office or I
have failed in any way to follow the proper and normal procedure for
circulating amendments to all Committee members, I will wholeheartedly
and unreservedly apologise. I am unclear about whether we have made
such an error, and because of how the hon. Member for Rayleigh chose to
raise the issue, I have not been able to find
out—
James
Duddridge (Rochford and Southend, East) (Con): Perhaps I
can help to clear up the point absolutely so that the Economic
Secretary can apologise now to Committee members. As a Back-Bench
member, I did not receive that communication as I expected to. I found
that disrespectful to all Committee
members.
6.45
pm
Ed
Balls:
As the hon. Member for Rayleigh said, I have served
on only two previous Finance Bills, so I am still a novice compared
with him in the procedures and courtesies. That is why I said that I
shall look into the matter. If I find that we have made a mistake, I
shall apologise unreservedly. I fear that, like me—perhaps more
than me—the hon. Member for Rochford and Southend, East is a
novice in such matters. He would do better to wait for me to look into
the issue before he reaches a
judgment.
Mr.
Francois:
I made my point in that way because the problem
appeared to have occurred twice in the Committee. If the Minister will
listen, I will say that I will take him at his word. Last year, he
dealt with the issue courteously. If he agrees to look into the matter,
I hope that he will discover exactly what happened. I genuinely think
that there has been a mistake, and that is why I raised it. I
understand that the Minister will look into it. We shall try to
establish exactly what did and did not
transpire.
Can we make
it the norm that everything should be circulated to Committee members?
That is normally what happens and it would avoid problems in the
future. I hope that the Minister will take my comments at face value
and that he will go back and double check.
Ed
Balls:
As I said, I am very happy to do so; indeed, I said
that I would. I have always endeavoured to conduct myself with
Opposition Committee members in a courteous and proper manner when it
comes to how we go about these proceedings. It seems entirely
appropriate that we should disagree on the politics; however, in my
previous debates with the hon. Member for Rayleigh, I have always
conducted myself in that courteous manner. Indeed, when the issue arose
last week—I had had no knowledge of it until the Committee
started—I said not only that if we had made a mistake we would
apologise, but that I would shift us from negative to affirmative
procedure to clear up the matter if that could be done in consultation
with the business
managers.
Obviously,
like the hon. Gentleman, I am annoyed—to put it mildly—at
the possibility that normal past procedures have not been followed. I
shall look into
that.
The
Chairman:
Order. For the sake of the rest of the
Committee, we will draw a line there. The Minister will do his checks;
we should now return to the
debate.
Ed
Balls:
I am happy to take your guidance, Mr.
Illsley.
I turn to the
schedule and the two questions raised by the hon. Gentleman. As I said,
the schedule makes some minor changes to the existing legislation. The
definitions of profits, financing costs and owner-occupation now work
in the same way for group and single-company UK REITs. The definition
of derivative contracts has been extended to make it clear that such
contracts that hedge risk in relation to liabilities in the property
rental business, as well as assets, are covered.
The condition prohibiting
profit-linked loans has been relaxed so that companies can use ratchet
loans, in which the interest rate for borrowing money reduces as
profits increase. The proposed legislation also clarifies the powers of
the special commissioners in respect of appeals and ensures that
charities are exempt from tax on distribution from UK
REITs.
I turn to the
extension of the regime. The changes will make it easier for companies,
particularly new listed ones, to become UK REITs. Companies will no
longer need to be listed on a recognised stock exchange before they
give notice to join the regime but will be able to join on the first
day on which they are listed. The changes also allow companies to join
the regime if they cannot meet the asset test on the first day on which
they enter it. That will make it easier for newly established or newly
listed companies to join, by allowing them time to acquire rental
properties.
As
announced at the PBR, there will be a tax charge if the company
breaches the asset test on day one of entry to the regime, the detail
of which is contained in the Real Estate Investment Trusts (Breach of
Conditions) (Amendment) Regulations 2007. A draft copy of the
regulations has been made available. Following consultation on them, we
propose a further relaxation so that failure to meet the asset test at
the beginning of day one of the regime will not count as a breach of
conditions, as it would under current
regulations. That will make the relaxation on listing more effective for
potential entrants to the regime. The final change allows
extensions to the Real Estate Investment Trusts (Joint Ventures)
Regulations 2006 to be effective from 1 January. A copy of the draft
joint venture group regulations has been made available. The revised
regulations extend the rules for single-company joint ventures to cover
joint ventures carried on by groups. Again, following consultation, we
propose a further relaxation to the draft regulations. That is to allow
companies 60 days after the regulations come into force to give joint
venture notices for accounting periods beginning on or after 1 January
2007. The relaxation will allow companies to wait until the regulations
come into force before giving a joint venture notice, and will still
enable them to take advantage of the retrospection offered by paragraph
14 of the schedule.
The hon. Member for Rayleigh
asked whether we were minded to change the qualification rule that
there should be a full listing, rather than an AIM listing, to the
stock exchange. He repeated my commitment of last year to keep the
matter under review, although I did not announce on Report a formal
review. Since then, I have actively championed—in the UK and in
other parts of the world—the benefits of the AIM regime and its
lighter regulatory approach.
As the hon. Gentleman knows, we
judged last year that it was important, particularly when the REITs
regime was becoming established, that investors could have confidence
that they would have the regulatory protection of a full stock exchange
listing, especially given that we were trying to encourage retail
investors to see the attractions of such collective investments. Our
judgment on that matter has not changed; we have not decided to change
the AIM requirement, but I am happy to say to him that I will continue
to keep the matter under review. Furthermore, at the time of the
pre-Budget report, we will set out in detail our thinking on the
matter, following nine months’ operation of the regime. It is
too early at this stage, however, to reach a judgment different from
that of a year
ago.
Mr.
Francois:
I thank the Minister for that comprehensive
answer. We look forward to hearing what he comes up with in the 2007
pre-Budget report. In connection with that, I shall briefly offer him
the thought that allowing REITs to list on the AIM would be a good way
of boosting residential REITs, because residential property companies
often have a much smaller market capitalisation, as many are not listed
on the full London stock exchange. Perhaps he will bear that in mind
ahead of the pre-Budget report.
Ed
Balls:
I understand the hon. Gentleman’s point. A
year ago, we discussed in detail our judgment that that was not the
right road to go down at this stage, but I am happy to set out more
fully our thinking in the light of 9 months’ operation of the
REITs regime. It is too early to reach a different judgment at this
stage.
The hon.
Gentleman also asked about residential REITs, and I did not seek to
fudge the answer. There are no residential REITs; there are 14 REITs,
of which
two have a residential element but are not fully residential. In the
past year, we have consulted widely with the residential sector.
Indeed, at the instigation of the right hon. Member for North-West
Hampshire (Sir George Young), who took a particular interest in such
matters, I met him following our consideration of what became the
Finance Act 2006. I then met a group of experts, whom he had put in
touch with Treasury officials, to discuss the issues. We have not been
inactive on that score. The nature of the residential
and rental markets in the past year has complicated potential
residential REITs. We said—it was debated fully—that it
was more complex for residential REITs and registered social landlords
to take such a step and that it was therefore no surprise to us that
the lead came from the commercial sector. Proposals involving wider tax
changes, which go beyond the residential REITs regime, have been put to
us and we are studying them. If there are barriers to the operation of
residential REITs that we can deal with, we will do so. The regime is
not set in stone, but at the same time, we set out clearly our
objective of a revenue-neutral shift to a REITs regime. Issues on the
tax side were proposed to us which, to say the least, would have
required close and careful attention before we made any decision to
move forward.
It is
worth noting that Lend Lease has been public about the potential for
floating a residential REIT around their development in the Olympic
area and we are watching that with interest. However, at this stage a
residential REIT has not come forward, although after only five months
it is not possible to conclude that none will do so. As I said, if we
can, we will address the relevant issues and we continue to keep a
close eye on developments in the residential
sector.
Rob
Marris:
I am heartened by my hon. Friend’s
comments, particularly what he said on the wider changes being proposed
to him and his colleagues in respect of residential REITs. I still have
a fear, which I expressed in the Committee last year, that if
residential REITs simply buy up existing property, it could lead to an
increase in house prices, which are already overblown. Most people are
keen that there should be much more house building in the United
Kingdom and I hope that REITs will have a role to play in that respect.
Paragraph 3.121 on page 69 of the Red Book refers to a
“target to raise the number of new
houses being built to at least 200,000 net additions a year by 2016.
Substantial progress towards this target is being made with over
180,000 net additions in the year to March
2006.”
I make
two comments on that paragraph. It ties into the residential aspect of
the REITs regime if we can encourage new house building, but 200,000
net additions a year in housing stock in the UK is woefully inadequate.
There are approximately 150,000 divorces each year and probably almost
as many partners who are not married who break up, many of whom have
children, and that is likely to lead to the formation of many more
households. There is also considerable migration into the United
Kingdom, which has brought much benefit to the economy but put pressure
on the housing stock.
The figures that have been
published since the Red Book itself was published show that housing
starts in the United Kingdom fell in the year to March 2007. They went
below 180,000 by several thousand; we actually went in the wrong
direction in that financial year. The Government must consider whether
the REIT regime could be used or whether the wider tax changes referred
to by my hon. Friend are needed markedly to increase the number of
houses and flats—residential units, if I may put it that
way—being built in the United Kingdom each year. The figure in
France, which has a similar population, is 300,000 units a year and it
still has markedly increasing house prices, although not to the same
extent as in the United Kingdom in recent years. It causes great social
pressure in our country and great distress to people who cannot afford
to buy a house because supply is too limited, meaning that prices go up
very considerably.
I
am not a housing expert, but I believe we need to build more than
300,000 units a year and the market is not doing that. There is clear
market failure in that regard, perhaps occasioned by land companies
holding on to their land banks and not developing them. I urge the
Treasury to consider the wider issue of what tax changes could be
brought about, perhaps by means of penalties for those sitting on land
banks, tax encouragement for those who wish to create new housing
stock, or a combination of the two. That may or may not fit into the
residential aspect of the REITs regime. In terms of the AIM issue,
which might suit residential REITs better, I understand why my hon.
Friend is keeping the matter under review, as REITs have been in
operation only since January. The Treasury and the Government need to
look at the tax regime to encourage a step change upwards in the number
of housing units being built in the United Kingdom each
year.
7
pm
Ed
Balls:
I take my hon. Friend’s comments very
seriously. We had a long discussion last year about the way in which
the REITs regime could contribute to our wider objectives on housing
supply. I explained then that the real issue was whether we could reach
a consensus in the country about building more houses, but that
consensus is proving
elusive.
I owe the hon. Member for
Dundee, East an apology. To answer his question, the calendar year was
specified so that the regulations could apply from the start of the UK
REIT regime on 1 January. We will, as I said, keep the AIM issue under
review in the coming months as well as any changes that are proposed or
considered to encourage residential
REITs.
Question put
and agreed
to.
Schedule
17, as amended,
agreed
to.
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