City firms well placed to cash in on launch of real estate investment trusts

Property lawyers have hailed the long-awaited confirmation of the introduction of real estate investment trusts (Reits), but have warned that crucial questions remained unanswered.

City real estate practices expect to reap immediate rewards once Reits are introduced in mid-2006, but details of a conversion charge to offset Treasury tax losses are still missing.

SJ Berwin property partner David Ryland said: “We’re another half-step nearer to where we need to be, but it’s only a half-step. The whole thing still hinges on the crucial statement on what the tax conversion charge will be.”

Reits will abolish corporation tax in return for distributing 95 per cent of income to shareholders, making them highly attractive.

Only listed property companies resident in the UK will initially be able to benefit, putting several City firms with strong real estate practices in prime position to benefit.

“There are only about 10 or so big property companies that would immediately be in a position to take advantage of this law,” said Lovells head of real estate Robert Kidby.

Herbert Smith property partner Chris de Pury said: “If they get it right, it’s going to have a huge impact. It won’t be a nirvana, but for now it’s still wait and see.”

De Pury pointed to examples in Ireland, which have been unsuccessful, and in France, which has a tax conversion charge of 50 per cent. However, Reits have been hugely successful in the US and Australia.

Property companies such as British Land, Brixton, Hammerson, Land Securities, Norwich Union, Scottish Widows and Standard Life are considered likely to convert, possibly generating work for a swath of firms, including Dundas & Wilson, Freshfields Bruckhaus Deringer, Herbert Smith, Linklaters, Nabarro Nathanson and SJ Berwin, among others.

The Treasury is expected to limit a Reit’s borrowings and development activity. The legislation fine print is due to be published before the end of the month.

Reits are expected to overtake Jersey property unit trusts in popularity, opening investment to the mass market, increasing the liquidity of the fund and removing the stigma of offshore investment.