Clause 21 - Real estate investment trusts

Finance Bill – in a Public Bill Committee am 12:30 pm ar 12 Mehefin 2012.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of Peter Bone Peter Bone Ceidwadwyr, Wellingborough

With this it will be convenient to discuss the following:

That schedule 4 be the Fourth schedule to the Bill.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

It is a pleasure to be back in the Finance Bill Committee under your chairmanship, Mr Bone. I am sure that we have all had a very enjoyable break and are desperately keen to be back discussing the future of real estate investment trusts. I can see by the looks of excitement on the Government Benches that everyone has their speeches ready.

It is important to put it on the record that the clause aims to make improvements to the real estate investment trust regime by addressing barriers to entry and investment, and by reducing the costs of complying with its requirements to help support the expansion of the property sector and so encourage further investment and stimulate the construction industry. When considering what I would say on this matter, I used my trusty red pen and marked down that at this point I must not tempt the wrath of Mr Bone too much by straying on to any other issues that relate to the macro-economic situation or the construction sector. However, it is worth noting that in the summary of impacts published by the Government, they state that the changes:

“should facilitate increased investment in REITs and the private rental sector. This may in turn stimulate the construction sector. No significant macroeconomic impacts are anticipated.”

That is important to mention ahead of the comments that will undoubtedly be made if I mention Labour’s five-point plan. Of course, there are other, additional ways to stimulate the construction sector, not least of which is to find other ways of investing in the housing sector, to ensure that we have a social housing programme and a programme to ensure that any repairs, retrofitting and various other things are taken forward.

Photo of Charlie Elphicke Charlie Elphicke Ceidwadwyr, Dover

The hon. Lady talks about welcoming the idea of REITs for social housing. Are we now to understand that the Labour party therefore welcomes the effective privatisation and market quoting of social housing?

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

Well, there is a big difference between supporting this particular initiative—which was, of course, introduced by the Labour Government; I will go on to say a bit more about that—and supporting wholesale privatisation of social housing, and I am sure the hon. Gentleman is well aware of that. I hope that we have his support not only for social housing through the various means by which in general it is provided but for the fully mutual co-operative housing option that all too often does not receive the support it deserves.

Photo of Charlie Elphicke Charlie Elphicke Ceidwadwyr, Dover

I have a lot of sympathy with the hon. Lady on the idea of mutuals and social enterprises for housing, particularly social housing, and it is right to develop that. Let me press her again. A REIT is a quoted enterprise on the stock market that would own social housing. Are we to understand that the Labour party is in favour of social housing being quoted on the stock market?

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

As I said to the hon. Gentleman, I will come on to some of those points when I discuss the detail of the legislation. It is important to set this in context as one method of trying to stimulate further work in the social housing sector, although not the only one. In due course, it would be interesting to extend the support that the hon. Gentlemen seems to be indicating to other ways of ensuring that affordable housing is available, in particular for the co-operative model.

I will resist the temptation to talk about other housing issues that relate to people being removed from their local areas because no adequate social housing is available for those on the homeless list, or the impact of the so-called bedroom tax—that is another area in which a Government U-turn would be welcome, but I do not want to stray too far from the clause.

Clause 21 aims to change the barriers to entry to the scheme and come up with some improvements. Specifically, the entry charge paid by a company joining the regime is to be abolished; the requirement for a REIT to be listed on a recognised stock exchange is to be relaxed; and, the diverse ownership requirement a REIT has to meet is being reduced. The condition improvements state that,

“the rules regarding the REIT’s assets are being relaxed to reduce the likelihood that commercial decisions are being influenced by the conditions of the REIT legislation; the condition regarding the level of borrowing for a REIT is being made simpler to comply with;”.

It is important to understand the background to this provision, and the hon. Member for Dover referred to some of the changes that are going to be made. Real estate investment trusts are a tax advantage vehicle that was originally introduced in the Finance Act 2006 and subsequently incorporated into further legislation in part 12 of the Corporation Tax Act 2010. As I said, that was set up by Labour to encourage investment in the property sector, and the regimes came into force on 1 January 2007. As of 1 April 2012, I understand that there were 24 REITs in the UK, with a particular focus on commercial property investment and an aggregate market capitalisation of approximately £20 billion.

REITs are exempt from corporation tax on the profits and gains arising from the property rental business, and they must distribute 90% of the profits from the property rental business to shareholders in whose hands that income is treated as income from property. In that way, taxation of income from property is moved from corporate to investor level.

There have been some concerns that the UK regime has not yet had the success of similar regimes such as, for example, those in the US. That is partly, it is argued, because of the depressed property market, and partly because of the number of conditions that a company has to meet to become a REIT. In particular, the entry charge has been identified as one thing that has served as a deterrent. Unlike some Government Members— I am not trying to provoke a row or argument by saying this—I never thought that any Government of any colour had all the answers when pieces of legislation were introduced, and it is always important to improve legislation where we can.

On this occasion, I have resisted the temptation to table amendments to the clause and ask the Government to carry out further work, and I will say something about that at the end of my contribution. It is important, however, to recognise that this legislation was set out by the Labour Government, and we want to see improvements to the regime.

In their response to their consultation, “Investment in the UK private rented sector” in September 2010, the Government indicated that they would look further at the barriers to entry to the REITs regime with a view to facilitating greater take-up and, in the longer term, the establishment of residential REITs. Further consultation with interested parties suggested that the best way to support the REITs industry, and in particular, the development of residential REITs, was to reduce the barriers to entry and ensure that the regime did not inhibit good business practice. That is why the Government, as I understand it, announced in the Budget 2011 that, subject to informal consultation, legislation would be included in the Finance Bill 2012 to support good business practices and remove the barriers to entry and investment in the REITs regime. A subsequent consultation took place between April and June 2011, which provided the opportunity to firm up and improve some measures that have been included in the Bill.

In the Budget 2012, the Government announced that they would consult this year on the REITs regime, and specifically, the role that REITs can play in supporting the social housing sector, as well as whether to change the treatment of income received by a REIT when it invests in another REIT. I have not tabled an amendment to the clause because I recognise that a consultation is  under way, and I am willing to look, as I am sure we all are, at what the Government may propose. Dependent on the outcome of the consultation, which will run until the end of June, the Government may suggest further changes in the Finance Bill 2013. If we are spared from reshuffles or other acts of greater powers, I am sure that we are all already looking forward to that Bill—I see that the Whips are thinking, “If we ever get to the end of this one”, so I will not press that point.

I want to raise a few issues about the summary of the proposals. The clause has an extensive explanatory note and although I will not go through every point in detail, it is worth putting on record some changes that are being made to the Corporation Tax Act 2010.

Section 528 of that Act requires that a REIT is listed in a recognised stock exchange. It also requires that a REIT is not a close company—in other words, that it cannot be controlled by a small number of people, which is described as the non-close company requirement. Section 530 requires that a REIT distributes 90% of its profits from its property rental business to investors, while section 531 ensures that a REIT is primarily a property investment company by requiring that profits and assets of the property rental business of the REIT are 75% or more of the total profit or assets of the REIT. Section 538 requires a company joining the REIT regime to pay a conversion charge equivalent to 2% of the value of its assets involved in its property rental business. Section 543 restricts the amount of borrowing undertaken by a REIT in respect of its property rental business by charging to tax the amount by which its financing costs exceed a limit. Section 556 determines the treatment of assets involved in the property rental business, and specifies that when the asset is disposed of, the REIT does not benefit from the exemption from tax. Those are only some of the issues that the extensive explanatory note lays out.

Among the proposed revisions are that the entry charge will be removed, on the understanding that that will make REITs more competitive with other forms of investment, such as funds and authorised unit trusts. The requirement for a REIT to be listed in a recognised stock market is to be relaxed so that listing on other foreign exchanges will be possible. That is supposed to encourage smaller entrants to join the regime, with the suggestion that by keeping operational costs down, REITs may be more attractive to the residential sector. Cash and cash equivalents will be a good asset, which was not the case in the past. That point was raised by the industry during the previous consultation, and the industry wishes to see that cash can be included in the test that 75% of the total value of assets must relate to the property rental business.

A REIT is currently exempt from corporation tax on both rental income and gains on sales of investment and properties used for a property rental business. Tax is instead borne by the investors on their share of rental income and gains, which are distributed to them by the REIT as a property income distribution. There is to be no breach if the distribution is made within six months to settle an underpayment, whereas previously a period of three months was allowed. That relief has limited application because it applies only if a stock dividend is offered in particular circumstances.

One important change is that institutional investors will now include charities and registered providers of social housing, as well as partnerships, sovereign wealth funds, pension funds, insurance companies, and managers and trustees of authorised unit trusts and open-ended investment companies. That is intended to increase the diversity of ownership. There will also be a power to make regulations to add, modify or remove categories of investors on the list. Will the Minister tell us what she has in mind in that context?

There is also to be a grace period for new REITS of three accounting periods—up to three years—which prompts a question that I want to ask the Minister. In the explanatory notes and the schedule, different periods are referred to at different times. Sometimes the legislation refers to three years, but at other times it relates to three accounting periods, yet those terms are not absolutely interchangeable. There are also some issues around changes applying from different dates. For example, paragraph 21 of schedule 4 sets out that paragraphs 14 to 20 apply from the date of Royal Assent, and paragraph 26(1) sets out that the same applies to paragraph 22— I hope that the Minister or some other inspiration is following this—but paragraphs 23 to 25 apply

“for accounting periods beginning on or after”

Royal Assent. Such things may seem technical or unimportant, but I raise the matter to give the Minister the opportunity to clarify the position and to draft any amendments that may be required.

The legislation also provides for the introduction of anti-avoidance to prevent the extension of the close period for a transfer of business. The profit finance ratio cost will be amended, and I understand that the industry was particularly keen for that to happen. I hope that I have made it clear that we do not oppose clause 21, and we await further consultation with interest.

The Bill lists a new range of institutional investors, and although the concept of allowing institutional investors is welcome, it is disappointing that the definition does not include other REITs or companies that are diversely held. The legislation also gives the Treasury power to make regulations to extend the list of institutional investors. What additional groups does the Minister intend to include through such regulations?

It would also be helpful to hear from the Minister about the problem of practical barriers. Notwithstanding that the improvements to the regime will be welcomed, does she accept that there are still barriers for residential REITs, in particular because the rental income received from residential property is generally low, and yields from such property are usually realised by fairly regular re-sales of properties? A high turnover of properties may mean that such companies do not qualify as property rental businesses for the purpose of the regime, so they could not become REITs. Will the Minister address that, either now or in the upcoming proposals in the year ahead?

Photo of Charlie Elphicke Charlie Elphicke Ceidwadwyr, Dover 12:45, 12 Mehefin 2012

I just want to touch on social housing REITs. No doubt the hon. Lady is, like me, an avid reader of Inside Housing. On 18 May, a story stated:

“Associations to raise £500 million with stock exchange ‘privatisation’ plan…A consortium of 10 housing associations is  to list a company made up of 10,000 social homes on the junior London stock exchange in September.”

Does she support that plan—yes or no?

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I do not have the advantage of having an iPad close to hand so that I can receive inspiration. Of course, as a former housing spokesperson in the Scottish Parliament, I take a great interest in social housing. I gently suggest to the hon. Gentleman that the fact that housing associations have chosen to raise finance from a range of sources—partly because the Government do not always supply that funding—does not equate to privatisation. That is a fundamentally important point in our allowing social housing associations to raise money from various sources.

Photo of Sheila Gilmore Sheila Gilmore Llafur, Edinburgh East

Housing associations frequently raise money through banks and other private institutions as part of their building programmes because the grant never covered the full cost, even when it was higher. That is a money-raising issue. Housing associations are controlled by strict regulation, and I hope there is no suggestion that that regulation will disappear.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

My hon. Friend has a long and honourable history of addressing housing issues during her time as a councillor in Scotland’s capital city of Edinburgh, and she speaks with a great deal of authority on such matters, to which she is fully committed.

It is important to stress that the changes are an opportunity. Once again, partly because of the way in which the process of considering and scrutinising the Bill is constructed, I find myself almost trying to explain what the Government are doing, rather than the Government explaining it themselves.

I do not want to tempt fate or risk your annoyance, Mr Bone, given that we are approaching the end of the sitting, but it is important to stress that although we welcome the proposed changes, this is not the only way to ensure that the construction industry is stimulated and housing issues are addressed. There is no opportunity today for a wider debate on a range of housing matters but, as my hon. Friend has suggested, this is potentially one way to ensure that housing associations and other social housing providers can raise funds in a new way.

Photo of Sheila Gilmore Sheila Gilmore Llafur, Edinburgh East

When REITs were originally introduced, they were intended to be—and were encouraged to be—part of the residential property market. They do not necessarily address only social housing; they also address the resurgence in the private letting market and they fulfil a need that has been clear in the past few years. Many people in housing were disappointed that, in their initial shape, REITs did not seem to be particularly successful in assisting the residential market. Hopefully, the changes in the Bill will allow that to happen.

As we all know, the private letting market tends to be disparate—some of it is good, and some of it is bad. The ability to operate on a larger scale and in a more organised manner improves management and stability quite a bit, which is good for residents. One of the big problems with private letting is its short-term nature. That obviously has an impact on the individual who wants to live in that kind of accommodation, but it is also a disadvantage to communities. Many of us struggle  with communities that are suffering from the impact of short-termism from the point of view of landlords and the tenants who live in these properties.

A more institutional approach to private letting, which REITs would offer in theory—that was the debate I recall taking place in the housing world at the outset—would encourage a more systematic and larger scale approach to its provision. That might make it much easier for people to live there in the longer term. Many have suggested that that might be advantageous to the economy, not just the individuals involved. One theory—I am not sure whether it is proven or simply debated a lot—about why some countries in Europe have more stable economies is that they have not gone quite so enthusiastically down the route of home ownership and an element of the private letting market has given them stability. I do not know whether that is necessarily a universal view, or even whether it holds, but it suggests that there is something worth encouraging in the private letting market.

If we had greater investment and people saw this as something in which they wanted to invest for the long term, providers could offer longer leases. That would be a very healthy development in the market and could improve a lot of communities. Without my venturing into the role of private letting for social housing, it has a worthwhile one to play. If these changes make it possible for this concept to move beyond largely commercial property and offer such an advantage, it is something that we would want to support, as my hon. Friend the Member for Kilmarnock and Loudoun said.

Enlarging those who could be part of a REIT and enabling social housing providers, charities and others  to be part of one is quite an important step, although it requires some caution from those who enter into it. Some social housing providers are interested in looking at how this might assist them to expand their provision and find sources of financing, because things have become increasingly difficult. If we are serious about wanting an expansion of social housing, it is not surprising that social housing providers want to look at this as an option for them to get financing elsewhere. Sadly, they are finding it increasingly difficult to get sufficient grant funding, as grant levels have fallen in both England and Scotland in recent years. That means that we either have less housing provided, or try to find other means of funding it.

The traditional means has been through bank lending, but although one might argue that many housing associations are good, stable, long-term investments, some providers have found it difficult in the past two or three years to obtain the bank lending that they got previously. Some banks that supported this form of housing have moved out of the field and no longer provide the same loan assistance. In the absence of some of the more traditional ways of funding social housing, it is not at all surprising that people are interested in at least exploring this option, if it enables them to provide badly-needed housing.

The Chair adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at half-past Four o’clock.