Communities and Local Government CommitteeSupplementary written submission from Grainger plc

INQUIRY INTO FINANCING OF NEW HOUSING SUPPLY—SUPPLEMENTARY EVIDENCE REGARDING THE PROJECTION OF THE NUMBER OF HOMES THAT BUILD-TO-LET COULD DELIVER AND CHANGES TO THE REIT REGIME

We are grateful for having been invited to give oral evidence to the Committee for this particular inquiry. We strongly believe in the need for government and industry working together to find ways to unlock new sources of financing for housing supply.

Please find below our answers the supplementary questions we have been asked subsequent to the oral evidence session.

Projection of the Number of Houses that could be Delivered Through Build-To-Rent Institutional Investment Models between now and March 2015

Unfortunately, predicting the number of houses that could be delivered over the next three years through an institutionally invested Build-To-Rent sector is impossible. It may be useful, however, to put into context where the residential investment sector is today and the potential the institutional investment market holds for the residential sector.

Currently the Private Rented Sector in the UK is worth around £500 billion. Of that amount, institutional investment is approximately 1% or £5 billion. In comparison, the commercial property sector has over £120 billion of institutional investment.

While institutional investment in residential will unlikely reach the same levels as the commercial property sector, it demonstrates the enormous potential for institutional investment in the residential sector.

Reaction to the Changes to the REIT Regime

We believe that the measures on the REITs regime in the draft Finance Bill are all positive. They bring the sector one step closer to the possibility of residential REITs. The changes will encourage residential property companies to explore the opportunities arising from the changes for the possibility of setting up a new residential REIT.

The barriers to entry for residential REITs have been reduced through the changes in the draft Finance Bill including the abolishment of the conversion charge, the opening of the regime to diverse ownership, close company tests being given longer to comply with the rules, cash being a good asset affording the REIT more time to acquire the right assets, and financing costs being redefined so that the tax charge on excessive interest doesn’t apply to non-interest finance costs.

The one aspect of the REIT regime which was not taken up in the draft Finance Bill is the distinction between trading and investment for residential REITs.

As the regime stands, residential companies are likely to be ineligible to convert to a REIT because they fail the trading/investment test. This remains a significant barrier for residential REITs.

We have previously asked the government to consider the trading versus investment distinction specifically in the context of and for the purposes of residential REITs. We believe that this fits well with the existing REIT regime, but government has not yet addressed this barrier for reasons that have not been fully explained.

Again, we’d like to thank the Committee for inviting us to give evidence to the Committee and look forward to seeing the outcome of the inquiry.

December 2011