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

Hi Tom.
As most of these properties will have tenants, and tenanted properties usually sell at a discount, I presume this would be reflected in the valuation?
Is there a "norm" as to what the discount for being tenanted would be?

Reply to the comment left by John Frith at 09/06/2018 - 22:54
Hi John

I have been selling properties tenanted over the last few years at full market value. One already sold this year and a second is under contract. Believe it or not, investors are still buying!

Reply to the comment left by John Frith at 09/06/2018 - 22:54
Hi John,

We are actively seeking tenanted properties. Our surveyors will give an open market value for the property. I cannot say what this will be, but we are not seeking heavy discounts on properties we are buying for shares. Indeed, we will pay more when we are buying for shares than we would do if it was for cash.

All the best,

Tom

When encountering a new (to me) business opportunity, I feel more comfortable if I understand how the other party makes it's money.

It seems that this is a good way for a REIT to expand it's market share, by effectively by giving REIT shares instead of the cash that it would need to raise to top up it's mortgage for an open market purchase.

What is the REIT's name so I can look up it's current bid / offer spread?

Reply to the comment left by John Frith at 10/06/2018 - 13:17
Bid/offer spread is set by brokers.

Our “House Rules” preclude mentioning companies but if you complete the enquiry to contact Tom offline I’m sure he will be only too pleased to provide you with the additional information you are seeking.

Hi Tom,

I have a long established portfolio with mortgages just over 2m mortgages with values and income that fits your criteria. Due to section 24 I am considering the many options of a way out, REITs may tick all the boxes, I am interested to learn more of your proposal.

You say you are “not seeking heavy discounts on properties” this implies you are seeking some discount, I would like to learn of the cost factor break down.

Tom, kindly give all costing examples that you know of, from initial cost factors involved in pre-arrangements with you prior to an agreement, covering completion of sale/purchase, ongoing annual fees, charges through to sale of shares, I have listed some questions under.

In a scenario where the owner considered the property value to be 100k and the independent RICS Surveyor carried out the valuation to the same conclusion. Given that the criteria of mortgage balance of 15 times yearly rental income or the LTV is greater than 65%

1, What in your experience would the Surveyors report cost?

2, Most importantly what would your offer of purchase be?
(Just a heads-up to other property118 members my knowledge of capital gains tax is; if you sell under value HMRC will still want their cut of the full value)

3, Would the percentage of your offer be the same for lower or higher value properties? If not please state the difference.

4, Capital gains costs aside, kindly state all cost facts that you are aware from start to completion of the process.

5, What if any are the ongoing costs related to the shareholding factor?

6, What costs of are involved to the original owner selling the shares?

For myself and most landlords that I know, have a high degree of control of their income and fortune, to commit to a REITs company could be seen as a blind leap of faith to give up such control. What’s stopping any REITs company from taking the money and run, Your company is relatively new, if a lender go bankrupt the debit is potentially wiped out, if your company when bankrupt the shares would be nil or less!

7, I think I know the answer is there any form of protection to your shareholders in the event of your company failure?

I look forward to your reply
Regards
Kris Baker

Reply to the comment left by Chris Baker at 10/06/2018 - 14:01
Hi Kris,

Thank you for your comment. I am glad to hear that you think REITs would offer you a solution.

1. We will pay for the valuation
2. We will judge every transaction on its own merits so I cannot say what discount, if any, that we would seek. However, we are not looking to rip off any landlord, we are offering a solution to a problem that many landlords face and do not want a reputation for offering low prices.
3. Again, we will judge every property and every transaction on its own merits. In my experience, every landlords situation is different.
4. The only initial fees for a landlord selling their property to us for shares would be their own legal fees and any potential accountancy fees. The legal process is more or less the same as a sale for cash, the only difference being we will be paying in shares (or part shares part cash). Our accountants, BDO, have offered to act for any landlords for a fixed fee. We are willing to pay this fee for early entrants into the REIT.
5. No ongoing costs to being a shareholder.
6. The only costs for selling shares would be brokers fees.

I understand the lack of control factor. However, we are an experienced company. The company was set up in 1981 by my Father, an FRICs Surveyor with over 60 years of experience in property. I have a Real Estate Management degree and our Non-Executive Director used to run the estate agency firm, Douglas & Gordon. Between us we have over 100 years of experience in the property world. At last count my Father has been through 5 crashes and rebounds so has the experience and know how to guide the company through any economic situation. REITs are highly regulated by HMRC, we simply cannot take the money and run as the money is our Shareholders' money. If we did that we would end up in jail, which I do not particularly fancy! In the absolute worst case scenario we will sell all the properties owned by the REIT and return the cash to shareholders. At the end of the day the underlying asset is bricks and mortar.

7. Continuing from above, if Shareholders are not happy with the way the Board are running the company then they can simply vote us out at the AGM. Obviously I do not want this to happen!

I hope this answers your queries but please do let me know if you have any more. Please fill in a contact form and we could have a chat in greater detail.

All the best,

Tom

Hi Tom, thanks for your reply,

It is a credit to you that you don’t charge for the valuation, I guess you add this to the first year running cost of a successful purchase.
Even with the nil cost to offer, please understand I would be more comfortable to know that in your best scenario I would be willing to accept your purchase offer, I have wasted time and effort with a local council before who made all the right noises but when it came to the bottom line we were mile apart.

8, May I ask you to elaborate on my questions 2 and 3, you must be able to give a few examples without divulging sensitive data. Or if not, you must be able to indicate your structure for working out your offer to value factors?

9, You say you converted to REIT in December 2017, roughly 6 months ago, from your statement after your answer to my question 6, I am right to conclude you converted to REIT under the same business name your father, Peter started in 1981?

With your degree in property you will know the capital gains aspect would be based on the actual sale value not the price sold if its discounted, at worst any landlord needs to factor in an extra 28% of the different between value and discounted agreed price.

10, In the scenario where we shared a 60/40 percent shareholding at day one, and the start value of shares are £1 each, kindly give an example of how and when is the equity gains of the shares worked out, to make it easy to see I would like you to show the calculation as if a property was valued at 100k and a purchase was agreed at 95k if I am correct that equals a 57k / 38k value, as an example after a period of time I wished to sell all my shares, and the value matches 100k would this be counted as 60k/40k, would I get 40k back?

11, I am interested to learn about the high regulations that you say HMRC apply to REITs can you guide me to where I can see for myself what the HMRC regulations are?
If as you say if you can’t take the money and run I would like to learn just how high such penalties would be, any penalty helps, but I have seen many cases where the penalty even a short spell in castration is nothing to the gain involved, and we are talking multi millions in your case. The portfolio I have built-up has come because of high personal calculated risks and personal sacrifices at the end of the day any moves I make in reaction to section 24 needs to be fully understood.

With respect to your reply to number 7, on a slightly mute-point, if I grasp the structure of your business, it means your company will always hold the majority of shares so your shareholder would never be in a position to vote you out. So unless you can state otherwise the worst any shareholder (other than yourselves) could do is have a good grumble at the AGM.

I know my questions may be a bit nitty-gritty, I could message you directly, however my thoughts are if they are shared and open to other Property118 members they too may gain reassurance from your answers, so hopefully you will also see the benefit from many others by addressing the issues I have raised especially to my further points on my question 2 and 3.

Regards kris

Reply to the comment left by Chris Baker at 11/06/2018 - 14:33
Thank you for your community spirited approach Chris, it is much appreciated by me and no doubt many others who will read this discussion thread.

Reply to the comment left by Chris Baker at 11/06/2018 - 14:33
Hi Kris,
Thank you for your reply

8.We honestly do not have a set structure for working out offer to value factors. In theory, if a landlord will be making a large tax saving by selling to us for shares we would look to join in on this saving, but at most it would be 2-3% off the value. We do not want to straight jacket ourselves bu sticking to a strict offer to value ratio. What I can say is that we want to be fair to landlords, they will afterall be our shareholders should we buy their properties for shares.

9. Yes, we converted the existing company to a REIT using the same name.

I cannot comment on CGT and HMRC's treatment. What I can say is the the definition of a valuation is what a willing buyer agrees to pay to a willing seller. I think it would be quite hard for HMRC to question any transaction under these circumstances.

10. Sorry, I do not quite follow. What do you mean by "shared 60/40 shareholding"?

11. https://www.gov.uk/hmrc-internal-manuals/guidance-real-estate-investment-trusts this link should give you all the information required. It is not just HMRC but our lawyers and accountants who will keep a close eye on everything we do. BDO are our auditors, should anything untoward be in our accounts they will spot this very quickly. The company has been built up over many years, we have put all our £10million portfolio in, we are not here to steal other peoples' money. At the end of the day, if we were caught stealing the money, the Proceeds from Crime Act would prevent us actually having any of it!

With regard to question 7, no one person can own more than 10% of a REIT. As a family, we count as one person. Therefore, we will, hopefully, very quickly be a minority shareholder and have no control. We have put a lot on the line by converting to a REIT, it took 18 months of hard work and quite a bit in fees. We think it is the best way for landlords to maintain a property income without having to worry about the hassle of being a landlord and the issues over increased taxes.

Absolutely delighted to answer any of your questions. Property is my passion and I love nothing more than talking about it.

All the best,

Tom