UK real estate investment is considered by many to have a positive and significant track record of attracting investment flows as an 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.
Structuring using Jersey companies and/or listing on TISE is an attractive alternative for REITs
What is a UK REIT?
A UK REIT is a real estate investment business that meets eligibility criteria set out by the UK tax authority, Her Majesty's Revenue and Customs (HMRC). These eligibility criteria include that:
- the property investment business be structured as a company (or group of companies) which is tax resident in the UK
- the principal purpose of the business is real estate investment, either in UK or international real estate and specifically,
- at least 75% of the business's profits are derived from real estate rental income, and
- at least 75% of the business's gross assets comprise cash or assets involved in real estate rental investment business.
- shares issued by the REIT must be either listed on or admitted to trading on a "recognised stock exchange", "recognised" by HMRC under the UK Income and Corporation Taxes Act 2007 (ICTA). This includes TISE as a recognised exchange as well as the London Stock Exchange.
What are the advantages to investors of a UK REIT?
Investment in a UK REIT provides investors with investment returns directly correlated to an investment return on the UK commercial (or residential) property rental market on a tax efficient, risk diversified, pooled investment basis.
Although a UK tax resident company, a UK REIT delivers an investment platform which the UK framework has made exempt from double taxation, i.e. it is effectively tax transparent for its investors so moves the point of taxation from the Company to the investor.
A UK REIT is exempt from UK corporation tax on both the income profits and capital gains derived from the REIT's UK qualifying property rental business. Profits (income and gains) of the property rental business are exempted from tax, but distributions of those profits to investors as dividends are taxed in the hands of the investors.
UK REITs must distribute not less than 90% of their taxable income in each accounting period to investors. Investors are taxed under the laws applicable to their own tax residency with UK taxation (in relation to international investors) being treated as taxation on property rental income and are therefore subject to a UK withholding tax at the UK basic rate of income tax for non-exempt investors. Exempt investors such as charities, UK companies and pension funds can register to receive UK REIT distributions of income gross rather than are subject to withholding tax.
Liquidity in secondary market investment in UK REITs is further enhanced by differential rates of UK transfer tax applicable to UK companies. Investment in shares issued by a UK incorporated REIT will incur UK stamp duty of 0.5%, in contrast to UK stamp duty land tax on direct investment in UK commercial property of 5%.
The original UK REIT framework included a conversion charge of 2% for existing real estate investment businesses converting to REIT status and a requirement for a spread of investor ownership. To increase the attractiveness of the REIT as a real estate investment platform, the UK has abolished both of these requirements. No conversion charge now applies and the spread of ownership rules no longer apply restrictively to institutional investors.
UK REITs can also now be wholly owned by one or a small number of institutional investors.
Recognised Stock Exchanges - The International Stock Exchange
A quarter of all UK REITs are listed on TISE. A TISE listing enables a real estate investment group to meet this requirement for UK REIT status with the advantage of significant cost saving and operational efficiency.
Initial and annual fees are highly competitive being set currently at £5,000 on application for a primary listing for a closed-ended investment vehicle such as a UK REIT with annual listing fees of £2,000 for such issuers.
TISE also has a responsive approach, deliberately fostering strong relations with listing sponsors and whose listing and membership committee meets daily to consider applications. This ensures that well-constructed listing applications can be progressed to admission to listing in 4-6 weeks.
TISE's business-orientated approach is demonstrated by its adaptation of the generally applicable rules as to free float in the shares of listed investment companies. The general rule, that at least 25% of such listed companies' shares be held in public hands, has been disapplied in relation to REITs. This complements the UK's abolition of restrictions on ownership concentration for institutional investor REITs.
Therefore, joint venture, club investment or single institutional investor REITs can be listed on TISE.
TISE applies globally recognised stock exchange listing standards, based on London market norms, in a manner which is pragmatic, proportionate and adaptable to the needs of individual investment businesses. The investor protection standards applied by TISE have been recognised internationally 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.
As at Q2 2017, the total value of TISE listed securities stood at circa £400 billion and the total number of listed securities stood at circa 2,400, with a year-on-year increase in applications of 45%.
All applications for admission to listing on TISE and for continuing eligibility purposes require the support of a listing sponsor authorised to act as such by TISE's listing authority.
Ogier Corporate Finance Limited (OCFL) is a market leading listing sponsor on TISE.
- Satisfy listing conditions
A UK REIT applying for TISE admissions to listing must satisfy all conditions for listing or receive specific derogation consent from individual conditions where appropriate. The issuer, its professional advisors and OCFL will work together to ensure the suitability of the proposed listing prior to formal application.
This listing will be under chapter 7 of the Listing Rules of TISE which covers investment vehicles and includes REITs. A REIT is treated similarly to a very private fund if it is a joint vehicle, with appropriate derogations being granted.
A non-exhaustive list of factors to consider include:
The Listing Document must contain sufficient information to enable investors to make an informed assessment of the REIT and its listed securities. This generally applicable rule is supplemented by specific disclosure requirements.
TISE must be satisfied, on review of individual director declarations, that
- the directors have sufficient and satisfactory investment management experience of real estate investment business
- the directors can demonstrate the ability to act independently of any investment manager which may be appointed
- if the REIT is a non-regulated vehicle, management must comply with published TISE policy in guidance notes
- the board must comprise a minimum of three directors, of whom at least two must be independent of any investment manager, investment advisor or related party
- the directors will be responsible for the information in the Listing Document which will state that responsibility and be signed by them
- The REIT must invest with the aim of spreading risk.
- Listed Securities
- The listed securities must be freely transferable, unless specific derogation is granted by TISE, and a minimum market capitalisation of £500,000 be achieved.
The issuer must prepare (in accordance with its applicable national law) audited accounts which:
- cover at least three years (and the period to which the accounts relate must not end more than twelve months prior to the date of the Listing Document), subject to any specific derogation granted;
- are consolidated accounts prepared in respect of the issuer and all its subsidiaries (if an issuer is required to prepare consolidated accounts under its chosen GAAP);
- have been prepared and independently audited in accordance with the TISE policy and (subject to that policy) have been reported on by the auditors without qualification
A derogation from the requirement for three years audited accounts would be expected, on application, for newly constituted investment vehicles (including REIT's).
2. Preparation of application
OCFL in conjunction with the REIT's professional advisors will prepare drafts of the formal listing documentation for review and comment by TISE, as follows:
- formal application for listing;
- sponsor's declaration;
- directors declarations;
- listing document signed by or on behalf of the directors of the issuer;
- any necessary application for derogation(s) from particular listing requirements;
- financial statements; and
- accountants' report and any statement of adjustments.
Once TISE's listing department is satisfied with an application it will prepare a recommendation as to the suitability of the listing proposal to TISE's listing and membership committee.
If the listing and membership committee approves the application, the listing documentation is signed and filed and the securities are admitted to the Official List. Scanned copies are sufficient and there is no need to provide originals.
Once listing has occurred, the REIT must comply with the continuing obligations specified in TISE's listing rules. The continuing obligations are intended to ensure that all market users have simultaneous access to the same information and to maintain an orderly market in the listed securities.
This client briefing should be read in conjunction with our briefing entitled "The International Stock Exchange (formerly known as The Channel Islands Securities Exchange Authority Limited or CISEA) – Continuing Obligations for issuers with listed Investment Vehicle Securities", which contains a detailed summary of these continuing obligations.
Are all UK REITs also UK incorporated companies?
Although it is a requirement that a UK REIT be a company and be tax resident in the UK, this does not necessarily mean that the company itself must be incorporated under the UK Companies Act 2006.
Of the UK REITs which are admitted to listing on TISE at the date of this briefing, over 50% are companies incorporated in Jersey, but managed and controlled in the UK.
The tax laws of both Jersey and Guernsey expressly confirm that companies incorporated in either jurisdiction will be solely tax resident in the UK if managed and controlled in the UK and UK tax resident under UK law.
Jersey companies law closely follows England common law but has also adopted useful innovations. Notably, in connection with a UK REIT's obligation to distribute 90% of its real estate investment income profits in each accounting period, Jersey and Guernsey companies law provides for distributions to be authorised on a cash-flow solvency basis, rather than on the basis of distributable profits and reserves, which can provide a more practicable and realistic accounting basis for distribution decisions.
In addition, Jersey and Guernsey companies laws recognises cell companies, enabling the statutorily ring-fenced, differential treatment of different asset pools where commercially appropriate. It is also the case that no stamp duty is payable on subscription, transfer or redemption of shares in Jersey and Guernsey incorporated companies.
Wherever incorporated, specific advice should be obtained by the REIT's board in relation to cross-border investor marketing and any applicable regulatory requirements under the applicable law of its' domicile.