LONDON Billions of pounds of trophy commercial properties may open up to retail investors for the first time by 2017 as pension funds and insurers look to push the assets into UK real estate investment trusts (REITs).
The UK Budget is due on March 23, and two sources familiar with the matter said the government plans to open its REIT rules on closed company and diverse ownership to consultation, with a view to relaxing these barriers to sector entry.
"If the closed company rules (for REITs) were to be eased, I think there would be some demand on the part of large pension funds, insurers and significant investors for that type of structure," said Bill Hughes, managing director of institutional fund manager L&G Property, a unit of insurer Legal & General (LGEN.L).
If carried into law, the eased rules could come into force as early as July 2012, meaning blue chip insurers and pension funds could either individually or collectively bundle property assets into REITs as they terminate closed-ended funds.
"The (closed-company) rule is not working, and they (HMRC) know it," said Phil Nicklin, a real estate tax partner at accountancy firm Deloitte, noting the static number of quoted UK REITs and few new entrants to the tax-efficient structure.
"I'm fairly confident that this (regulatory) change will happen," said Nicklin, who advised on the government on the REIT rules introduced in 2007. There are now about 20 UK REITs, the biggest being Land Securities (LAND.L), British Land (BLND.L), Hammerson (HMSO.L), and SEGRO (SGRO.L).
David Skinner, investment strategy and research director at Aviva Investors (AV.L), said a rule change could see billions of pounds of top UK property owned by insurers and pension funds -- hitherto closed to retail equities investors -- placed in REITs.
"It wouldn't seem to me to be a completely unreasonable number to say a few billion pounds within the next five years. What would determine that would be the profile of funds expected to unwind over the next few years," said Skinner, noting Aviva Investors had considered forming REITs in the past.
Data from INREV shows 13 UK closed-ended funds with gross assets totalling 4.4 billion euros will terminate in 2012-2015. In 2016-17, another seven UK closed-ended funds with 1.3 billion euros of gross assets will terminate.
As it stands, the closed-company rules applying to UK REITs do not recognise the underlying diverse ownership that pension funds and life funds have.
The top five shareholders -- defined as those each having 5 percent or more of the votes -- cannot collectively hold more than 85 percent of the votes, a rule that precludes most insurance and pension funds from forming REITs.
"I would envisage (if consultation results in changes to the UK REIT rules) a new more sophisticated rule which looks at whether the shareholders themselves are diversely owned, when determining whether the REIT is diversely owned," Nicklin said.
Property industry group British Property Federation has lobbied the government to relax the closed-company and diverse ownership rules, arguing it would encourage sector growth in a tax-neutral manner.
Even if the REIT rules were changed, Nicklin said insurance funds and pension funds forming REITs would still have to pay the required 2 percent of gross assets conversion charge and have at least 35 percent of their shares held by the public.
"We'd like to see the scope of the regime broadened and made more vibrant, and I think L&G would look at the sector more favourably if that were to happen ... We would contemplate it as being a useful exit route for assets that wanted to broaden their ownership," Hughes told Reuters. (See www.reutersrealestate.com for the global service for real estate professionals from Reuters) (Editing by Jon Loades-Carter)