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

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

14:35 PM, 8th June 2018, About 6 years ago 82

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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

Mark Alexander - Founder of Property118

7:34 AM, 9th June 2018, About 6 years ago

Reply to the comment left by sam at 08/06/2018 - 23:39
Hi Sam

27 degrees and a sea breeze is exactly what we have in Malta right now. It is also true that we have 300 days a year of sunshine and a very favourable tax environment as well as deep culture and a Mediterranean style of living. However, July/August are just too hot for us. Temperatures are into the 40's and can hit 50+ with 98% humidity. Are you sure you want to visit in July?

Insofar as seeing family and friends, I can honestly say this hasn't been a problem for us. They all enjoy cheap/free holidays and we get to spend more quality time with them now than we ever did when we lived in Norfolk. Also, Skype, FB Messenger and What's app are all wonderful tools for keeping in touch.

I August we are taking a weeks holiday in Torquay!

Best we get back to talking about REIT's though now, because we are into serious thread drift here. By all means email me if you would like to chat more about Malta though - mark@property118.com

Darren Peters

14:03 PM, 9th June 2018, About 6 years ago

If you exchanged say 1 million of equity in property for 1 million of REITS shares then the govt decided that companies would also not be allowed to put finance costs against profit, what would the return or dividend reduce to?

I'm thinking along the lines that the dividend could drop to zero and the share price rapidly follow. If this happened while still holding the properties there should still be something tangible left to sell. So in this scenario, would the REIT sell down the properties at whatever they could get and distribute final dividends?

Tom Tennant - REIT Providor

14:09 PM, 9th June 2018, About 6 years ago

Reply to the comment left by Darren Peters at 09/06/2018 - 14:03
Hi Darren,

Thank you for your comment.

REITs do not pay any corporation tax. So if the government did extend Section 24 (there have been rumours about this) then we would not be affected. The government could remove the whole REIT regime, however, all the big property companies, British Land, Land Sec, Segro, etc, are REITs so it would be very hard for them to do so.
The Government are trying to professionalise the private rented sector and are actively encouraging the REIT market.

The absolute worst case for our REIT would be to sell all our properties and return the cash to shareholders. Unlike service companies, we have tangible assets that can be sold. In addition, as there would not be any tax to pay on any gain we made the distribution to shareholders in this instance would be higher.

I hope this answers your query.

All the best,
Tom

Darren Peters

14:16 PM, 9th June 2018, About 6 years ago

Reply to the comment left by Tom Tennant - REIT Providor at 09/06/2018 - 14:09
Yes thanks Tom. If there was a circumstance where properties had to be sold, must they be sold at arms length/independently valued? Must the sale money realised be distributed with the same 90% rule as rental profits?

Tom Tennant - REIT Providor

14:21 PM, 9th June 2018, About 6 years ago

Reply to the comment left by Darren Peters at 09/06/2018 - 14:16
If the properties had to be sold we would simply put them on the open market.
No, in this instance, 100% of the proceeds will be distributed to shareholders.
It must be said that this is an unlikely outcome and very much a worst case scenario!
We have put all our properties into the REIT and fully believe that it is the best way for landlords to exit the market whilst retaining an income.

Bill Morgan

15:02 PM, 9th June 2018, About 6 years ago

Reply to the comment left by Neil Patterson at 08/06/2018 - 10:34
If some of my properties are sold off let's say 25 per cent and I pay uk cgt and I later decide to put the other 75 per cent in a reit will I still qualify for s 162?

The reason why I'm asking is because I might buy a house in portugal and will need some cash.The remainder I will stick in a reit and live off it. You don't have to pay tax on dividend income for 10 years in portugal. So perhaps I can receive divided income tax free?

Tom Tennant - REIT Providor

15:05 PM, 9th June 2018, About 6 years ago

Reply to the comment left by Bill Morgan at 09/06/2018 - 15:02
Hi Bill,
Yes, you can sell off 25% and out the rest in the REIT. Or we could give you 75% shares and 25% cash.

I am not sure on the tax situation in Portugal so cannot advise on that I am afraid!
All the best,
Tom

Mark Alexander - Founder of Property118

17:13 PM, 9th June 2018, About 6 years ago

Reply to the comment left by Bill Morgan at 09/06/2018 - 15:02
Relief under TCGA92/S162 only applies when when transfer relates to the ‘whole business’

Laurie

18:05 PM, 9th June 2018, About 6 years ago

How is the equity in the property calculated - is this based on surveyors valuation?
Is this for property all over the UK?

Tom Tennant - REIT Providor

18:08 PM, 9th June 2018, About 6 years ago

Reply to the comment left by Laurie at 09/06/2018 - 18:05
Hi Alex,
Yes, we will instruct an independent RICS Surveyor to carry out a valuation of the property.
Yes, we are looking to buy properties all over the country.
All the best,
Tom

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