Funds world can capitalise on downturn

In both stable economic conditions and financial crisis, the property funds industry faces the same challenge: having its concerns addressed by government policy. Often its voice has been drowned out by other sectors. Now, given the financial crisis and the prospect of a general election within two years, we must reassess our strategy and consider how to be more effective.

Learn from REITS

REIT legislation took too long to be enacted because of a lengthy consultation process and unrealistic policy objectives. It’s an irony - given the illiquidity that has since beset the market - that one objective was to improve the quantity and quality of finance for investment property.
By 2007, when REIT conversions were permitted, the market was already peaking. Although existing listed investment companies converted, REITs have remained unattractive to new entrants as a means of raising capital.
Government may claim credit for REITs but it was largely responsible, 10 years earlier, for creating the need for them. It decided to ‘raid pension funds’ with the abolition of repayable tax credit, and did not seem to realise the adverse effect on property companies.

This meant that pension and other tax-exempt investors incurred a tax hit if they invested through property companies, but could avoid the hit by owning property directly or indirectly - for example, through limited partnerships or offshore vehicles.

The damage was reflected in listed company share prices. REIT legislation relieved the problem for listed property companies, although it remains for unlisted companies.

Electoral cycle dynamics

Government needs to understand the industry better and legislate speedily. This may be achievable with a more interventionist government following the financial crisis. The industry must equally engage with policy makers and must establish a dialogue with the newly formed National Economic Council, through which the government is focusing its economic policy.

A general election is expected within two years, so now is the time to influence party manifesto policy decisions. Ideally, the industry agenda should be supported by a cross-party consensus.

High on the agenda must be unlisted REITs. The UK funds industry services institutional investors through offshore vehicles, which have a comparable tax status to REITs. The value of the underlying UK property held by unlisted and closed-ended offshore investment vehicles is estimated at £29bn. Surely it would be more efficient - and have advantages in terms of UK employment - if such vehicles were operated onshore.

UK competitiveness

The industry is increasingly exporting its skills and servicing clients in non-UK property markets. The government should develop legislation that enables UK fund structures to compete with those in countries such as Luxembourg, where a recent budget abolished withholding tax on dividends for substantial shareholders resident in treaty countries. This adds to the attractions of Luxembourg holding vehicles.

Comparable UK-based fund structures should be created for investment into the UK and non-UK property markets.

Overall, government must be more supportive of the industry’s contribution to the wider economy.