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 4 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

by Tom Tennant - REIT Providor

9:51 AM, 18th June 2018, About 4 years ago

Reply to the comment left by leannemurphy at 16/06/2018 - 09:14
Hi Leanne,

Thanks for your comment.
If you were to sell your properties to us in exchange for shares you will lose ultimate control of the properties. However, you will still own them through us.

We do not want to lose the property knowledge and experience of any landlord who becomes a shareholder. Therefore, if a landlord spots a great local deal for a property we will pay them an intro fee if we buy the property. This way landlords can still use their knowledge and participate in the buy to let market, but not have to worry about the tax and regulation changes.

Yes, unfortunately you might have to change the way you manage your portfolio due to the tax changes.

All the best,

Tom

by Tom Tennant - REIT Providor

9:54 AM, 18th June 2018, About 4 years ago

Reply to the comment left by Paul Machin at 17/06/2018 - 08:54
Hi Paul,

Thanks for your comment.
We are currently listed on The International Stock Market. We did not carry out any fundraising when we listed because our plan is to grow by buying properties for shares. However, we do plan on listing on the London Stock Exchange by the end of 2018 / Q1 2019. When we do this we will carry out some fundraising to bring in some cash to grow the company as well. When this is done I would expect early shareholders to see an increase in share price.

Yes, we can sell the REIT to a bank or similar institution. However, we have no plans to. Our aim is to grow the company into the UKs largest residential REIT.

Please let me know if you have any further queries.

All the best,

Tom

by Stephen Buck

15:53 PM, 18th June 2018, About 4 years ago

Are there any Inheritance Tax advantages to converting to an REIT, please?

by Tom Tennant - REIT Providor

17:48 PM, 18th June 2018, About 4 years ago

Reply to the comment left by stephen buck at 18/06/2018 - 15:53
Dear Stephen,
Thank you for your comment.

Inheritance tax wise the main benefit is that, if you were to sell your properties for shares, these shares can be split amongst your family or anyone you desire. It is easier to divide shares amongst family members than it is property.

I am not a tax expert, but I do not think REITs are way to save on inheritance tax.

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

by Mrs A

7:49 AM, 24th June 2018, About 4 years ago

Hi Tom, are there any asset types that your REIT would avoid, eg leasehold, HMO? I suppose that landlords would be trading the return they get on their own portfolio (that they understand well) for a syndicated return on the REIT’s properties that they don’t understand at all well. I can see that maintenance and rental income risks would be smoothed over a larger number of properties which is potentially attractive though. What info is supplied to prospective shareholders on the existing portfolio?

by Tom Tennant - REIT Providor

7:56 AM, 25th June 2018, About 4 years ago

Reply to the comment left by Claire Abel at 24/06/2018 - 07:49
Hi Claire,
Thank you for your comment.
No, there is not a particular asset type we would avoid. We are a residential REIT so our investments will be predominantly residential in nature.
My only concern with HMOs is when they are poorly managed. Properly managed HMOs are great investments.
Yes, a landlord might not fully understand every property we might invest in, however, the fundamentals of property investment are the same at any level. Buy at the correct price, manage the property well, avoid void periods, and keep the tenants happy.
Details of our current portfolio, and everything about us, can be found on our website. If you contact me via the form under the article I can send you all the information about us.
All the best,
Tom

by Norfolkngood

13:59 PM, 2nd July 2018, About 4 years ago

Hello Tom,
I have found your website and seen your previous REITs company accounts via companies house.
You stated to Clair Able, that details of your current portfolio, can be found on our website. Kindly point me to actually where your portfolio details are shown as I can’t find them for looking.

I did find your current share price showing at GBP0.008 shares each with over 9m shares issued.
I am green to the ways of shares, if 0.008 equals .8 of 1 penny, and if my calculations are correct this equates to just under a total of 73k for your collective members share value.
19. is this right?
20. if so how many members is this currently divided by?

Without being educated this does take away the share angle for me. I guess your current latest accounts will potentially show a more likeable figure.
I am waiting to see your latest account to 30th of June just gone, please let me know when they can be seen via Companies house.

In regards to payments for directors it appears none were given or received in the previous 2 years accounts.

As the membership dividends are derived from a 90% of the company profits,

21. kindly clarify what, if any protection there is or will be to protect the profit from being diluted by the directors claiming a George Osborne stile stupid £100k pa for just being a name on the firm? or syphoning
off profits by paying high expense charges to third party service companies that directors have interests in.? (I wound not necessarily view third party links via directors as a negative angle just one that
needs to be scrutinised)

22. Do any of the Directors have any interests or links to other companies that are used by the REITs company in connecting with any outgoing expenses?
23. Do you know of any rules that are in play to protect members from such syphoning actions?
24. What happens to the remaining 10% of profits?
25. I see you preference is to seek to grow via purchase of properties for shares, are you interested and do you have to capacity to purchase 2m of my tenanted properties without a share aspect?

Regards kris

by Tom Tennant - REIT Providor

14:35 PM, 2nd July 2018, About 4 years ago

Reply to the comment left by Chris Baker at 02/07/2018 - 13:59
Hi Kris,

I am delighted to hear you had a look at our website! Our current portfolio can be found in our Listing Document which can be downloaded from the Investor Page under "Company Documents".

19. 0.008p is the base cost of our shares, based on the number of shares when we converted to a REIT. The current share price is £1 a share based on the value of properties owned by the company.
20. The Tennant family currently own 99.5% of the company as we put all our properties into the REIT.

Our accounts are being prepared at the moment and should be available once they are audited.
No, as Directors we keep our salaries to a minimum in order to maximise payments to shareholders.

21. We have said all along that we do not plan on taking £100k style salaries or allowing anyone to have £100k salaries. We will be compensated through dividends and only when the company is making large profits. As with any public company, if the shareholders are not happy with how the Board are running the company they can vote us off the Board.

22. No.

23. I do not know of any rules

24. The 90% payment to shareholders is a minimum, we will look to pay out more if possible. Therefore, the remaining 10% will either be paid to shareholders or kept in the company to reinvest.

25. We want 75% of our growth to be through share issues and 25% through traditional cash purchases (or even a combination). So yes we might be able to purchase your properties for cash. Can you send me details of your properties?

All the best,

Tom

by Bill Morgan

6:34 AM, 4th July 2018, About 4 years ago

Hi Tom,

I have looked at your profit and loss account and most of the profit comes from the revaluation of the investment properties themselves.In 2017 it was £324513 against an operating profit of £69139.

Do you pay tax on revaluations? Its just that I thought capital gains tax was paid on gains when they are realised and not income tax.

by Tom Tennant - REIT Providor

8:09 AM, 4th July 2018, About 4 years ago

Reply to the comment left by Bill Morgan at 04/07/2018 - 06:34
Hi Bill,

Thanks for your comment and thank you for taking the time to go through our accounts.

Yes, most of our profit last year came from the increase in value of our properties following the valuations carried out for listing purposes. In 2016 - 2017 we had one property in London empty for 9 months. We have owned this property for 20 years and it has only ever been empty for one month previously, I guess that was a sign of the London market in 2016/17. I am happy to say that we let this property last June on a 3 year tenancy.

No, we would not have to pay tax on any increase in property values. We would only pay tax on the gain when we sold them. However, now we are a REIT we pay no tax at all, including CGT. For example, the London property above, if we sold that as a Ltd company we would have had a tax bill of £400k. Now we are a REIT we do not pay this and can reinvest this gain elsewhere.

If a landlord has a low yield but high value property that they want to sell but cannot because of a potentially large CGT bill, we can buy it for shares, sell it, not pay the CGT and then reinvest the proceeds in a more efficient manner.

Please let me know if you have any queries.

All the best,

Tom


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