{"id":12814,"date":"2023-11-07T12:55:32","date_gmt":"2023-11-07T12:55:32","guid":{"rendered":"https:\/\/iqeq.com\/?p=12814"},"modified":"2023-11-07T14:28:06","modified_gmt":"2023-11-07T14:28:06","slug":"the-background-requirements-and-considerations-for-establishing-a-private-reit-in-the-uk","status":"publish","type":"post","link":"https:\/\/iqeq.com\/insights\/the-background-requirements-and-considerations-for-establishing-a-private-reit-in-the-uk\/","title":{"rendered":"The background, requirements and considerations for establishing a private REIT in the UK"},"content":{"rendered":"
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Post-Brexit legislative changes could prove a pivotal turning point for private equity real estate (PERE) managers in the UK. Brought into effect in April 2023, these changes have enabled private real estate investment trust (REIT) structures. REITs, previously required to be publicly traded, are widely recognised and accepted by international institutional investors and offer a structure for holding real assets with diversification and taxation advantages.<\/strong><\/p>\n

Given these benefits, what should PERE managers consider when thinking about establishing a REIT structure in the UK? This article summarises the background of the regulatory changes, the requirements managers must meet to achieve and maintain REIT status, and the key factors to address when reorganising assets into a REIT structure.<\/p>\n

The background: regulatory changes and the introduction of institutionally owned private REITs<\/h2>\n

In the UK, a REIT is a company limited by shares that invests in real estate assets and carries on a property rental business, or a group of such companies. The rules for REITs were introduced in the Finance Act 2006 and came into force on 1 January 2007. REITs are exempt from UK corporation tax on income profits and capital gains, meaning the tax impact on investors is similar to making direct real estate investments. As tax is levied at the shareholder level, tax-privileged institutional investors can claim exemptions on property profits received from an UK REIT.<\/p>\n

These tax benefits saw large institutions increase their investments in UK REITs, and consequently aspects of the regulatory regime, which was initially written with retail investors in mind, became outdated. In 2012, changes to REIT regulations were introduced that relaxed the listing requirements, allowing AIM listing, reducing costs and providing flexibility; as well as relaxing the diverse ownership condition for when there are institutional shareholders.<\/p>\n

Listing requirements for REITs were then amended in 2022, removing the requirement for shares to be admitted to trading on a recognised stock exchange in cases where institutional investors hold at least 70% of the REIT\u2019s ordinary share capital.<\/p>\n

It is important to note that an authorised unit trust, an open-ended investment company or a collective investment scheme limited partnership that meets a genuine diversity of ownership test is itself an institutional investor for the 70% test. This opens up attractive options for structuring funds. For example, a private REIT owned by a limited partnership fund provides a very flexible fund vehicle. These have been used in the U.S. for a long time and we are now starting to see these in the UK following the 2022 changes.<\/p>\n

In effect, this rule change gave the green light to institutionally owned private REITs, providing PERE investors with a structure that is well-understood and offers attractive tax benefits to UK and international institutional investors, many of whom have pools of capital dedicated to REIT investments. As well as opening up fundraising options, private REITs offered PERE firms a potential new stream of deal flow as listed REITs were trading at deep discounts to NAV and could potentially be taken private.<\/p>\n

How it\u2019s done: the requirements to achieve and maintain REIT status<\/h2>\n

PERE managers exploring the possibility of using a REIT need to be aware of the conditions that must be met for a company to qualify and remain within the regime. These include:<\/p>\n