In this Q&A, partner Daniel Richards explores market trends in TISE as an option for listed REITS.
What is the background to the growth in interest in UK Real Estate Investment Trusts (REITs)?
2017 saw an increase in UK commercial property investment – mainly in London, but also outside of the capital – that has been driven by currency fluctuations, and foreign investors taking advantage of the weak pound. Partly as a result, UK real estate is considered an attractive alternative asset class for institutional investors such as pension funds, insurance companies, sovereign wealth funds and private equity for both UK-based investors and internationally. Research by JLL showed that investment into London rose by 35% to $33 billion as the city reclaimed the top spot for global real estate flows from New York. That rise came against a 6% increase in global transaction volumes. The London figures were boosted by two major transactions in particular – the sales of the £1.28 billion "Walkie Talkie" building and the £1.15 billion "Cheesegrater" building to Hong Kong-based developers (Ogier advised on both deals). With the increase in interest in UK real estate assets has come a surge in interest in REITs.
How do REITS work?
REITS were introduced in 2007 to encourage UK real estate investment, and the regime has been updated over the years to the point that they are an increasingly popular structuring option (similar REIT regimes exist in other countries around the world). UK REITs must be UK tax resident – although they do not pay tax on profits arising from property investments – but can be Jersey companies. Crucially, from the point of view of the work that we do, and why Channel Island structures are so popular at the moment, they must be listed.
Where does The International Stock Exchange (TISE) come into this?
One of the requirements for REITs is that they are listed on a recognised exchange, and TISE qualifies because it is recognised by HMRC under the UK Income and Corporation Taxes Act 2007. It might surprise some to learn that a quarter of all UK REITs are listed on TISE because of the exchange's low fees, quick turnaround, proportionate and pragmatic attitude to regulation. In addition to the recognition from HMRC, the exchange is also recognised internationally - investor protection standards applied by TISE have been recognised by the International Organisation of Securities Commissions (IOSCO) and the World Federation of Exchanges, both of whom have granted TISE affiliate member status. In addition to being recognised by UK HMRC for the purposes of UK REIT eligibility, HMRC recognition also applies for the purposes of long-term investment products for UK private individuals' self-invested personal pensions and individual savings accounts. TISE has also been accorded recognition from the German national financial services regulator, BaFin, enabling German mutual funds to invest in TISE listed securities and by the Australian Stock Exchange.
What are the requirements for listing on TISE?
To be approved, a UK REIT applying for TISE listing admission must demonstrate – amongst other things – that the directors have sufficient real estate investment management experience, the ability to act independently of any investment manager, and that at least two of them are independent. The REIT must also invest with the aim of spreading risk and its listed securities will be freely transferrable.
Why are investors and managers choosing TISE?
TISE has carved out a niche for providing a responsive and economic listing alternative where access to global market liquidity levels is not necessarily required. The turnaround time is quicker than other recognised exchanges, and the fees are lower – while the regulation is internationally recognised as effective. Where REITs are set up without the need to access as large a pool of investors as a London market offering, for example, and where the listing requirement is maybe more of a technical requirement rather than with the aim of raising substantial external capital, more and more asset managers are looking to TISE as a solution to their securities listing needs.
What is Ogier's background with REITs and TISE in particular?
Ogier has been a member of TISE since the exchange's launch in 1998. Our teams in Jersey and Guernsey particularly have developed long track-records in the various options that TISE presents. The firm is among the market leaders for listings on TISE – we have sponsored more than a quarter of all listings on the exchange. Besides our listings expertise, we have a long-established Real Estate practice with a particular expertise in dealing with international structures investing in UK property assets, both in and outside of London.
What is happening in the market now in respect of REITs and TISE?
There is a building interest in using TISE for REITs investing in UK real estate assets. That has been generated partly because of the upsurge in interest from foreign investors looking to take advantage of currency exchange fluctuations to buy attractive London real estate assets. Since the removal of the UK requirement for REITs to have diversified and independent investors, and the parallel removal of the former requirement for listed securities to have 25% of shares available to the public, TISE has become an increasingly obvious and attractive proposition for international investors and UK real estate investment managers.