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

18:17 PM, 9th June 2018, About 6 years ago

Reply to the comment left by Tom Tennant - REIT Providor at 09/06/2018 - 18:08
Hi Tom

Does that include Scotland, NI and Wales?

Tom Tennant - REIT Providor

18:20 PM, 9th June 2018, About 6 years ago

Reply to the comment left by Mark Alexander at 09/06/2018 - 18:17
Hi Mark,
Yes it does.
We will asses every property on its own merits and are not straight jacketing ourselves into only looking in one location or for only one type of property.
All the best,
Tom

Mark Alexander - Founder of Property118

18:21 PM, 9th June 2018, About 6 years ago

Reply to the comment left by Tom Tennant - REIT Providor at 09/06/2018 - 18:20
Very interesting thank you.

How will you manage the more remote elements of the portfolio?

Tom Tennant - REIT Providor

18:24 PM, 9th June 2018, About 6 years ago

Reply to the comment left by Mark Alexander at 09/06/2018 - 18:21
We will either keep the existing managing agent in place, if there is one, or seek to appoint a local agent to manage the properties for us if not.
Eventually, when we are large enough, we will bring the management in house. There is a fantastic amount of technology that can be utilised to make managing property on a large scale easier.

Mark Alexander - Founder of Property118

18:37 PM, 9th June 2018, About 6 years ago

Reply to the comment left by Tom Tennant - REIT Providor at 09/06/2018 - 18:24
Let’s have an offline chat about this after the weekend. Property118 Limited owns a 25% share in LettingSupermarket.com and a nationwide property maintenance business

Darlington Landlord

18:54 PM, 9th June 2018, About 6 years ago

Why do you specify "if your mortgage balances are greater than 15 times your existing yearly rental income or your LTV is greater than 65%"?
It sounds like the REIT is looking to aquire at a deep discount to market value

Tom Tennant - REIT Providor

19:22 PM, 9th June 2018, About 6 years ago

Reply to the comment left by Darlington Landlord at 09/06/2018 - 18:54
We will have a full RICS Red Book valuation carried out on every property we purchase and the price we pay will be based on this valuation. We are not looking to purchase properties with a large discount to market value.

"if your mortgage balances are greater than 15 times your existing yearly rental income or your LTV is greater than 65%" This comment is to do with our debt. If the landlord has debt in place we need to replace it with our bank. If the LTV is higher than 65% this is harder for us to do. However, this does not rule a landlord out, we can use cash funds to pay down the debt if required.

Bill Morgan

21:22 PM, 9th June 2018, About 6 years ago

Reply to the comment left by Mark Alexander at 09/06/2018 - 17:13
Hi Mark,
Are you saying that if I sold 6 properties in 2019 and paid uk cgt and then decided to put 25 properties in a reit in 2020 I will now be barred from s.162 because I have already sold off part of my business.?

If I was selling 6 properties in 2019 and transferring the other 25 into a reit also in 2019 I can see why hmrc would object but when there is a lapse of time I don't know if this would apply ?

So if I want to use a reit but also want some cash, how could this be achieved?

Can you borrow against shares? In other words put a mortgage on shares instead of property?

Mark Alexander - Founder of Property118

22:35 PM, 9th June 2018, About 6 years ago

Reply to the comment left by Bill Morgan at 09/06/2018 - 21:22
The rules say you must sell the ‘whole business’

I you sold a few properties previously at arms length that would be fine and wouldn’t exclude you from claiming relief.

If you wanted part cash and part shares there could be some CGT to pay. If you book a tax consultation with us we could help you to calculate that tax liability, and possibly even suggest structures to mitigate it. Every case is different of course because several factors need to be considered.

Mark Alexander - Founder of Property118

22:37 PM, 9th June 2018, About 6 years ago

Reply to the comment left by Bill Morgan at 09/06/2018 - 21:22
It may also be possible to borrow against shares but you the alternative is to sell them of course. That said, if the deal is properly structured from day one there may be alternatives.

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