Are REIT’s A Viable Exit Strategy For UK Landlords?

by Mark Alexander

2 months ago

Are REIT’s A Viable Exit Strategy For UK Landlords?

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Are REIT’s A Viable Exit Strategy For UK Landlords?

If you’re looking to continue to enjoy income and the potential for capital appreciation from property investment – without the hassle – a REIT is one of the solutions to facilitate this without the worry of ongoing maintenance, management tasks and ever changing regulations.

Perhaps you’re worried about the challenges posed to Buy-To-Let (BTL) landlords but you are reluctant to walk away from the income and the prospects of further capital appreciation.

I have started this discussion thread to introduce Tom Tennant, Chief Executive of one of the UK’s leading residential REIT providers. Tom has also very kindly agreed to participate in the commenting section of this article, to answer any questions Property118 members would like to raise publicly. Also, at the bottom of this article is a contact form to enable you to request a call with Tom offline.

To follow this discussion, please leave a comment and then subscribe the the comment notifications email. You comment can be anything from a detailed question or simply the word “following”.

What Is A Real-Estate-Investment-Trust?

A Real-Estate-Investment-Trust (REIT) is a highly regulated company, listed on a stock exchange, which owns and manages a diverse portfolio of properties.

REIT’s attract investment in two ways. The first is people who want to invest cash into the property market without the associated hassle of direct ownership of property. The second is to acquire existing property businesses in exchange for shares in the REIT. It is the latter of these which I think could be of interest to Property118 readers, in particular, those considering exiting the Private Rented sector but reluctant to so because they wouldn’t know where else to obtain the same returns as in property. For some landlords, it may be effective to sell their entire property portfolio to a REIT, swapping their equity for shares. In certain cases, this can be extremely effective because the transaction might also quality for CGT rollover relief under TCGA92/S162, also knows as ‘incorporation relief

Qualifying criteria

As a very rough guideline, if your mortgage balances are greater than 15 times your existing yearly rental income or your LTV is greater than 65% it is less likely that a REIT provider will be interested in transacting with you, i.e. buying your property portfolio.

Tax Relief and returns

If your rental portfolio meets HMRC’s definition of being a business you could sell your business to a REIT in exchange for shares. Rolling your capital gains into those shares can be particularly attractive, as can selling the ‘whole business’ in a single transaction with tenants in situ.

The REIT provider is compelled to distribute 90% of pooled rental profits back to its shareholders pro-rata to their shareholdings. Shares are on a listed stock exchange and may be sold at the market value at any time. Capital appreciation of properties within the REIT, as well as its dividend levels, obviously sets the market value of the shares.

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Comments

Neil Patterson

2 months ago

I can see this as an alternative to incorporating and keeping the benefits of your own portfolio that you have built up.

Possibly where you are looking to retire or get out almost completely and not looking to keep a direct interest in your own portfolio.

This could also be a much faster way of selling an entire portfolio in one go. I wonder if there is a maximum or even minimum value of portfolio that can be sold to REIT?

Presumably the REIT pays off the landlords' mortgages and the equity is swapped for shares in REIT?

Adrian Matthews

2 months ago

following

Gwen Davies

2 months ago

Following

Jim

2 months ago

Following

Courtney McLune

2 months ago

following

Reply to the comment left by Neil Patterson at 08/06/2018 - 10:34
Hi Neil,
Thanks for your comment.
There is no maximum or minimum size of portfolio that we would consider. However, the tax benefits vary depending on the size of the portfolio. For a landlord, who owns their properties in their own name, to qualify for CGT rollover relief, they must prove that they are running their portfolio as a business. In order to do so they must spend on average, 20 hours a week running their portfolio and ideally have over 5 properties.

Yes, we will pay off any mortgage in place and the landlord will recieve the equity value in shares. For example, a landlord with a £1million pound property portfolio with £600,000 of debt, will receieve £400,000 worth of shares in our REIT.

I hope that answers your query but please do let me know if you have any more questions.
All the best,
Tom

John Frith

2 months ago

I suspect the first two questions that came to me are such obvious ones that I might as well ask them publicly.
1) Assuming the valuation of the properties is not contentious, what is the typical ratio between the value of REIT shares exchanged, and the equity handed over?
2) What fees are involved that would reduce the remuneration?

Reply to the comment left by John Frith at 08/06/2018 - 17:43
Hi John,

Thanks for your comment

1) The shares in the REIT are currently worth £1 each. Any landlord exchanging their properties for shares will recieve the same value of shares as the value of their equity.

2) The only fees are standard legal fees associated with selling a property. The process is pretty much the same as selling for cash, the only difference being the Landlord will receive shares instead (or a combination of shares and cash, it does not need to all be shares).

I hope this answers your queries.

All the best,
Tom

sam

2 months ago

Hi Tom
1) Can you give us some idea of your and your REIT's track record ?
2) What level of dividend do you envisage for the immediate future ?
3) Given that my portfolio could have 0% or 50% CGT liability, how do you work out the compensation for my portfolio ?

Mark Alexander

2 months ago

Reply to the comment left by sam at 08/06/2018 - 19:42
Hi Sam

Please expand on the second part of your question as that doesn’t make sense to me.

Only Tom can answer the first part.

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