The REITs revolution

Written by: Alexander Garrett Posted: 05/07/2019

CITY_REITS illoThe Channel Islands are giving London a run for its money as the home to a growing number of high-profile property investments

In January this year, Jersey-domiciled Stonecutter Investments was admitted to the official list of The International Stock Exchange (TISE) with little fanfare. 

Even now, few have heard of Stonecutter – which is the vehicle for a large Asian pension fund – but it is a remarkable example of the enormous amount of real estate investment that gravitates towards the Channel Islands. 

Stonecutter’s principal asset is the headquarters of a global investment bank in London, recently acquired through a sale and leaseback deal. The building, one of the biggest of its type in London, is valued at a staggering £1.25bn. 

Stonecutter is the latest Real Estate Investment Trust (REIT) to join the TISE list in a trend that has seen the Guernsey-based exchange take an increasing slice of the lucrative REIT market. In this case, the investment vehicle was put together by Joel Hernandez, a Partner at Jersey-based law firm Mourant Ozannes, who says: “We’re seeing ever-expanding interest in launching new REITs. On an X-Y scale, the number is definitely going up.”

The Channel Islands have long been a destination where UK real estate investment could be safely structured offshore to take advantage of a range of benefits, including flexibility and tax efficiency. 

“Real estate funds are very much the Jersey fund sector’s bread and butter,” says Elliot Refson, Director of Funds at Jersey Finance. Figures in the Monterey Insight Jersey Fund Report 2018, he says, show net assets for Jersey’s funds industry of $411.1bn, of which real estate as an asset class was $64bn. 

In addition, research by Capital Economics shows that Jersey is home to more than £600bn in corporate asset vehicles, around 80% of which is thought to be invested in real estate, with a strong emphasis on UK commercial real estate.

Various vehicles have been used to hold those investments over the years – not least Jersey Property Unit Trusts (JPUTs), designed to hold commercial property investments that are generally exempt from UK capital gains tax and include ownership of landmark buildings in the City.

Today, most of the action is around REITs. In 2018, six UK REITs listed on TISE – greater in number and market value than those that listed on London Stock Exchange. There are now 22 UK REITs listed on TISE, of 75 in total, giving the exchange a market share of almost 30% – and 12 are also incorporated in Jersey. 

Reason for REITs

REITs were introduced in 2007 by the UK government to encourage investment in UK property. They are closed-ended vehicles that own and manage commercial or residential lettings property on behalf of shareholders, and which, importantly, are exempt from corporation tax on profits and gains from their rental activities. 

In short, they are an alternative to owning property directly, with many of the same benefits. 

Rob Milner, a Partner with Carey Olsen, says: “A REIT has a very unique set of tax circumstances, which are clearly defined. “One of the key points is that it defers a lot of the taxation to the investor, so it’s in their own hands. 

“First, that means the REIT can fit into their own tax structure; and second, it doesn’t penalise investors, who should be exempt – for example, if a pension fund comes in, you don’t want a scenario in which it bears tax it should not.”

Why now?

Given that REITs have been in existence for more than 10 years, why are they only just starting to take off in the Channel Islands? 

TISE Head of Communications Mark Oliphant says: “There are a number of reasons. People are turning to property as a steady asset class. There’s also been a regulatory push for property to be included in closed-ended vehicles, because of the problems experienced by some open-ended funds in both 2008 and 2016.” 

He adds: “There have also been some changes to the REIT regime, which mean that institutional investors are more likely to make use of it.”

Milner corroborates that. “Originally, the process to become a REIT was quite cumbersome, and there was an entry cost that had a disincentivising effect.” 

The UK’s HM Revenue & Customs has become more flexible on who can own a REIT and how it can be listed, he says, and the consequence is that institutional investors have realised that you don’t need to be a London-listed entity with a significant retail base to take advantage of the benefits.

Hernandez adds that another key catalyst for the launch of offshore REITs has been the UK government’s introduction of non-resident capital gains tax (NRCGT), which levelled the playing field between resident and non-resident investors. 

“Previously, the REIT regime was, for many, in the ‘too hard’ basket,” he says, “whereas using a non-REIT was comparatively easy. Now that the playing field has been levelled, REITS will be attractive to a wider number of investors.”

CITY_REITS illo2Broad coverage

The REITs that are listed on TISE encompass a broad range of different property types, from the various categories of commercial – office, retail, logistics and industrial – to residential lettings and even student accommodation. 

Broadgate REIT is the holding company for the Broadgate office estate in the City of London, which is co-owned by British Land and GIC, Singapore’s sovereign wealth fund. Broadgate has 4.7 million square feet of space and accommodates 30,000 workers.  

Meanwhile, Westfield UK REIT is an investor in Westfield’s London shopping centres. Sopro Holdings is a hedge fund-backed company that invests in social housing to help councils deliver frontline services – which can mean halfway houses for rehabilitation purposes. Liberty Living invests in UK student accommodation. And Links Healthcare is a REIT that bought and leased back 12 hospitals.

Oliphant says that REITs on TISE fall into two broad groups: those with a small number of large institutional investors, such as pension funds, insurance companies and sovereign wealth funds, often diverse internationally; and those with smaller value holdings held by groups of high-net-worth individuals, which are more regularly traded. 

By contrast, REITs on London Stock Exchange tend to be high value with larger numbers of investors – possibly even at retail level – and with greater liquidity. 

These factors influence the decision to list on TISE, as opposed to LSE, and also whether to incorporate in Jersey or Guernsey. Institutional REITs that do not require liquidity will find TISE a more cost-effective and speedy option, says Oliphant, while smaller REITs would simply not be able to afford an LSE main market listing. 

On the merits of choosing to incorporate in Jersey, Refson says: “Use of a Jersey company as a REIT will provide a more flexible company law regime, including in relation to capital distributions and the statutory ringfencing of liabilities of assets using an incorporated cell company.”
Jersey companies law also provides for distributions to be made on a cash-flow solvency basis, which can be advantageous.

Strong pipeline

Going forward, Brexit provides a significant unknown. But few doubt that, however that pans out, property will continue to be a significant asset class in the Channel Islands and that REITs will continue to thrive. 

Hernandez says: “Brexit has inevitably had an impact on investor sentiment in UK commercial real estate, but many expected far worse. From what we can see in the short term, our clients are lining up a number of significant UK real estate deals and the transaction pipeline remains strong. 

“Brexit is bringing back the ‘value’ investor, attracted by weaker sterling during this period of peak volatility.” 

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