Reits get the green light from Brown

Commercial property lawyers across the City are breathing a sigh of relief after Chancellor Gordon Brown confirmed the introduction of real estate investment trusts (Reits) for the UK in his Budget today (22 March).

Reits, which have been successful in Australia and the US for a number of years, will be introduced from January 1, 2007.

Among measures announced by the Chancellor include the all-important conversion charge, which will be levied at 2 per cent of the gross market value of investment properties at the date the company becomes a Reit.

The conversion charge, levied in the first accounting period of a Reit and designed to offset the Treasury’s future losses, had been seen as a major stumbling block.

Other measures include a reduction in the required distribution rate from 95 per cent to 90 per cent of net taxable profits to investors and a halving in the interest gearing ratio from 2.5 to 1.25.

SJ Berwin head of property funds David Ryland described the measures as “a reasonable response”, adding that there was “sufficient flexibility there for the property companies to look very seriously at converting [to a Reit].”

However, Farrer & Co tax partner Peter Davis sounded a cautious warning on the conversion charge. “As the basis is value, and not any capital gain, it seems the charge will bite even on a property that has fallen in value since acquisition and credit will not be given for any losses from sale of other properties in the past,” he said.

But as one lawyer commented, “the devil is in the detail.” City lawyers will be poring over the budget to be best poised to advise clients ahead of the 1 January activation date.