REITs - A force for good transcript

DJ: Hello.  A big welcome to everyone from all around the world and thank you for joining us today and really just to take a look at what is a game changer in terms of maximising your chances of accessing UK real estate product in something that, at the time now, is the tightest of markets and that's why using the UK REIT regime to your advantage.  So I'm David Jones, I'm a Partner and Global Board member at Ashurst and a member of Ashurst Global Real Estate Capital Markets Group.  I've been at Ashurst for nearly 30 years now and Ashurst really is one of the premier European real estate law firms.  We've been awarded European Real Estate Law Firm of the Year in recent years and we're also one of only a handful of law firms with Tier 1 status for Real Estate in the UK.

So today we're going to look at utilising the UK REIT regime and that's the direction of travel for the UK Government under their policy.  And this policy really is to encourage onshoring and that's a global trend that we've been seeing and following and anticipating for a number of years now with the increased use of REIT-like vehicles, OPCIs in France and SOCIMIs in Spain.

So in short, the huge potential tax advantages of UK REITs can be a game changer for you in terms of pricing and modelling, so that's on the way in on acquisitions, it's also the ownership in the whole period and on exit.  And the team that will take you through this today are Simon Swann and Tim Gummer, Real Estate Tax Partners at Ashurst.  Fiona, if you could perhaps pop the slide across.  Also Dean Hodcroft, Simon Todd and Ana Kekovska from Crestbridge who are leading the charge in Jersey listing for these UK REIT vehicles.  And the key for you is really just to be ahead of the game, utilise all possible advantages given the enormous weight of global capital that's currently sitting on the UK market.  And on that note I'll handover to a very special guest, which is Argie Taylor, from Cushmans.  Argie is already known to many of you, he's one of the leading European and UK investment agents.  He's got a truly global client base and a stellar track record and Argie's going to provide a high level overview of the UK market.  Thanks buddy.

AT: David, thank you very much for that very generous introduction.  As David mentioned, my name is Argie Taylor, I'm an International Partner at Cushman & Wakefield and I actually head up our Global Capital team in EMEA.  David and the team have invited me to give a quick overview of the UK market and you'll be very pleased to hear this is not just going to be a slideshow of Cushman's deals over the last 12 to 18 months but more a snapshot on where the UK market has got to in this COVID affected era.  But before I dive into the slides I thought I'll just share a point of view that is very relevant for today's webinar.  Some time ago when I was a trumped up young surveyor, which was about 20 years ago, I was having a very heated debate with a client and friend of mine who I suspect is also listing today on what really drives value in real estate for the principals.  I was arguing all about market dynamics and demands, supply etc. and he said, "No, you're wrong.  Not really.  What drives value or certainly protects value in real estate is not the market dynamics but more about making sure you get your debt and tax structuring correct".  And this is the main purpose of the webinar today where Ashurst and Crestbridge will further enlighten us on this exciting sort of tax structuring opportunity.  The great thing about their insight and expertise is fundamentally it's only going to help drive liquidity into the UK investor market which therefore comes back to my area which is positive.

But looking at the first slide today, I'm not going to go through all the graphs into great detail with time but fundamentally the economic impact of COVID-19 appears to be easing despite mixed progress on vaccinations across [inaudible].  But the consequences for real estate markets has been lagged particularly on the occupational side.  The world is clearly waiting for some clear data points that the efficacy of vaccines against the latest mutations, the latest being Delta, are robust.  Nonetheless, for real estate too there are now signs that the market is stabilising despite a difficult first quarter.  Unsurprisingly, as shown in the bottom right-hand graph the office leasing activity has been down but is now at a much slower pace than it was six to nine months ago.  There has been a bit of polarisation, offices are still soft, retail, as everyone knows, remains the main area of weakness both of which are offsetting the strong gains in logistics.  I should also add that the regional patterns also differ strongly.  London and the UK has been hit more economically than the Eurozone, as shown on the graphs, but investment outperforming relatively on a percentage quarter basis as shown on the top right.  If I could have the next slide please.

In times of weakness where London has arguably been more exposed to global events it has shown a clear yield discount to other competing European gateway cities.  This is obviously dot.com era, global financial crisis and also in a post-Brexit referendum era.  However, as you can see London has historically bounced back quickly but since Brexit London has shown the longest yield discount in recent history.  You could suggest that this is partly due to the uncertainty over medium and long term success of Brexit, we're not getting into that sort of debate today please, but also because of the cheaper financing experienced across Europe.  The trend now is that major European and global investors are recognising the material relative discount of London's yields and are increasing their exposure accordingly.  Great examples of this have been Deka, a major investor in the UK already but definitely ticking up their investment activity in the West End at the moment.  Union Investment from Germany has just bought BT's headquarters in Aldgate for more than €500 million, C&W advising on the sale side.  C&W have also run a very competitive bid process from Global Capital for Unilever's new office campus in Kingston.  It was not just domestic and European investors on that, very strong bids from the Middle East, Asia and America has led the way at the end.  All driving pricing beyond the quoting price.  Can we quickly go onto the next slide please?

Just quickly running from left to right, logistics is clearly the only growing sector in terms of rents as an average, retail warehousing has been less impacted, surprisingly, by the pandemic in terms of comparisons to shops and malls but this is because the sector was arguably already adjusted some time before the pandemic.  Office rents are generally down year-on-year in almost all UK submarkets.  For investment volumes the E-commerce trade-off sees logistics lead for investors, office appears to be biggest loser in both Central London and the regions and retail is down except shopping centres where the Trafford Centre deal, an isolated deal and off scale, has driven the trend up.

Yield pressures have intensified, onto the right-hand side, with much of retail seeing an increase while logistics has fallen further.  London office yield is largely stable while regional yields have softened only marginally.  Next slide please.

So lots of words on this slide but fundamentally let's pick out a couple of key points.  We are all expecting, not just advisors but investors, principals etc, are expecting a very strong second half of the year.  The traditional summer pause is clearly going to be affected, not just by frustration of holiday travel but also by people's willingness and desire to get on with investing.  Income, understandably, because of the spread is king, robust cashflows are being fought over as we have seen on a number of our sales recently.  ESG, it is no longer just three letters that gets thrown into the back of any presentation or any board paper.  It is very much a key area for institutions, lenders and fundamentally occupiers.  With this in mind I believe the UK is extremely well placed to lead the way globally in this field.  UK is already leading the way in green leases, it is arguably leading the charge in EPC and therefore, you know, has the potential and early signals suggests that's it's going to leave the aspirations on the ESG push.  Next slide please.

A little snapshot on where we are on the various sectors for rents.  UK prime rents, best in class, they are ticking up.  Fundamentally it's a flight to quality by the occupiers driven by the ESG agenda.  Residential driven by demographics is also on the rise.  The PRS model has been proven and is set to grow further.  Industrial slope suggests that the rents are slightly slowing but that's misleading, it is still in a growth sector, it's the last [inaudible] logistics is clearly accelerating on rents.  Unsurprisingly, the retail sectors, the secondary property sectors are continuing to see a downturn in rents.  London office rents last year were hit as people worked from home and are reliant, compared to other gateway cities, on public transport deferred people from coming into the office.  But rents are beginning to stabilise and for the best in class space that fits with all future environmental requirements etc. we can expect rents to recover quickly.  And actually given investor activity of late on refurbishment and redevelopment opportunities would suggest that a number of investors are factoring in significant rental growth in the office sector.  Next slide please.

I have to put this in here.  We are speaking to a global audience today, I've been beating this drum for 20 years, everyone else in our sector has beating this drum.  The UK has without doubt led the way on its transparency, its professionalism.  London is a true cosmopolitan city, we have long leases, we have true triple net leases, it's a very landlord legal market, this is being recognised by the international market for a very long time and we very much expect this to continue.  I just have to say that.  Next slide please.
Three quick slides before I hand back to the Ashurst team on investment trends.  Lockdowns and uncertainty caused by the COVID-19 pandemic clearly had an impact on the UK investor market, as I've already said, but 2020 was the least active year in eight years with transaction volumes in London the lowest in a decade.  Annualised volumes in Q1'21 remains subdued, unsurprisingly we are in a third lockdown, down 15 per cent on the same period of 2020.  In London Q1 volume dropped below three billion for the first time since Q1 2010 which was obviously after the Lehman's crash.  Regional markets performed slightly better in the past quarter with total volume at a similar level to their five year average.  Cross border activity moderated most in London while in the regions investment volumes did not record any significant fall.  Non-European capital has taken an increasingly larger market share across the UK particularly in the regional markets.  Next slide please.

No surprise that the Western economies have dominated the UK recently.  They already have a material investment portfolio in the UK, they also have their own office footprint for their own occupation therefore they are ultimately less frustrated by travel restrictions.  In the investment target section the winners, once again it's all about beds and sheds, you would have heard this from a number of people in recent times, apartments and distribution.  The losers, at the moment offices, we're expecting that to bounce back hard.  Hotels, fundamentally they've been shut but we all know that that sector will bounce back quickly as we start to travel more.  London continues to dominate the investment city of the UK, it has done for a long time and percentage-wise investment volumes were down last year but surprisingly resilient given the travel restrictions.  And let's not forget the uncertainty over Brexit that seems to have been forgotten in recent times.  Offices have generally been shut and a lot of work has exited the city.  Investment activities are already quickly picking up this year and subject to supply of kit and that's the key bit we expect investment volumes to quickly jump above recent years as global investors make strategic investment returns to the market.  Next slide please.

I have to just touch on the alternative sectors, these have always been considered alternative, they're now quickly becoming a top of a lot of global investors' investment requirements.  Just running from the left, student housing showed fantastic resilience last year but you could argue the numbers were slightly skewed by Blackstone's major investment into the IQ portfolio of 4.7 billion.  Healthcare, once again a very resilient market but you could argue a question mark about how big this market could really go in the future given the NHS footprint in the UK.  Life science, C&W research suggests there's over, well actually between 10 and 15 billion of hard equity, global equity chasing this sector but scale is going to be a challenge.  Clearly this side of the market in the past suggests that there's going to be a lot of frustrated equity in this area.  Hospitality, Blackstone, they bought Bourne Leisure, Butlin's etc, numbers will tick up, there has been strong resilience with the active staycation push but the distress you would expect has not been pushed through by the banks yet.  Data centres, volume once again but you would expect that number to tick up as the development pipeline starts to come through in the coming years.  There has been recent strategic plays with some recent press over Blackstone buying into or it's under offer on QTS Realty Trust which is a major 10 billion plus play.

One sector that is missing from here, and I just put it on people's agendas, is the senior living sector.  This doesn't fundamentally fall under healthcare, this is actually a living umbrella like student, PRS etc.  Senior care, which would then fall under healthcare.  C&W are very active in this sector, it's a hugely important sector with our aging population driven by the baby boom in the 1940s and 50s but also with the relative wealth tied up in people's homes who very much expect to watch that sector grow.

And with that I'd like to just go onto the next slide, I'd just like to say thank you everyone for listening.  My closing message, as a broker, I have to say, is the market … the UK is very much alive and kicking, don't believe everything you read in the press.  We're very much open for business and with that I am very happy to handover to the Ashurst team, thank you.

SS: Thank you Argie.  Those insights were extremely interesting.  Hello everybody, my name is Simon Swann, I'm a Tax Partner in the London office of Ashurst.  I've been at Ashurst for over 23 years.  Now together with my fellow Tax Partner, Tim Gummer, we're going to share some thoughts with you on tax structuring for UK real estate acquisitions.  Next slide please.
The main point we want to make is that in our view we are going to see REITs becoming more common investment or acquisition structures for UK real estate in the future and we want to explain to you why we think that, what the basis of our opinion is.  We're not saying that REITs are going to be the only structure of choice to the exclusion of all others, we're not saying that.  However we are saying though that we are likely to see an increased use of them in the future because they bring certain advantages.  Now to understand those advantages we need to step back and just consider the areas of reform of the UK tax system as it affects commercial real estate in the last few years.  And these reforms mean that the way deals are structured now are driven primarily by three factors.  Number one, the introduction from April 2019 of corporation tax on capital gains realised by non-residents after that date.  Prior to April 2019 non-residents by and large did not pay UK tax on gains made on disposals of commercial real estate.  And its only gains realised after April 2019 that are brought into charge and the way the legislation achieves that is that it permits investors a rebasing of their assets for the purposes of tax on capital gains as at April 2019. 

The second major feature is bringing non-resident corporate landlords within the charge to UK corporation tax from April 2020.  Previously they were subject to income tax on their rental profits.  And one of the main results of that reform is that the Corporate Interest Restriction Rules now apply to those landlords in the same way as they have done to UK companies for a couple of years.  Thirdly, the continuing ability to acquire shares in companies or units in unit trusts that own UK commercial real estate without triggering the charge to UK real estate transfer tax to SDLT.  And we are not aware of any plans to change that feature of the tax system.  Now I'm going to handover now to my fellow Tax partner, Tim Gummer, who is going to expand on the implications of these reforms in the next couple of slides.

TG: Many thanks, Simon.  Next slide please, Fiona.  So by way of an introduction my name is Tim Gummer, I'm a Tax Partner based in London and my practice specialises in the taxation of UK and European real estate.  Over the next couple of minutes I'm going to talk, as Simon says, about the practical examples of how tax structuring is becoming more and more important in the context of UK real estate capital markets transactions, and I wanted to start by briefly touching upon a point that Argie made right at the start of this webinar.  It's becoming increasingly important in the extremely tight real estate market, which David mentioned, to make sure that when people are bidding on assets that people are accurately modelling the actual entry price which is being offered of course, the taxes on ownership and then the exit modelling in terms of the overall assumptions which have been built into cash-on-cash and IRR driven investment models.  As Simon has mentioned, the recent legislative reforms over the last few years has had a profound impact on that and one of the real game changers we're seeing now is in relation to latent gains and how that affects the way that transactions are priced and how people are bidding on assets in the UK market.  Next slide please.

I'm going to talk now just in a very simple example in relation to how UK latent capital gains can have impact on pricing.  I'm then going to briefly handover to Simon who is going to talk about how there are different ways in the market in which bidders can put themselves at a competitive advantage when bidding on assets and how certain bidders can potentially make the problem that I am about to explain now go away when they're bidding on assets.

So if we start here with a simple example where a seller is offering for sale the shares of a non-UK resident target company, so a non-UK PropCo, and let's just take a simple example, the fact that the bidder is prepared to pay a gross bid price for the shares in that target company of £140 million.  And keeping things simple, that £140 million on a share deal would generally assume 1.8 per cent purchaser's costs.  If that same bidder was bidding on the underlying asset, the modelling assumptions would be different and it would be customary in the UK market to assume what we call full purchaser's costs.  So 6.8 per cent purchaser's costs rather than 1.3 per cent purchaser's costs but the net effect of that generally being that a purchaser will be prepared to pay less with the underlying asset than they would for the shares in the target company.  So let's just say in this example then that the same bidder was prepared to pay £133 million for the asset and let's assume that £133 million is the open market asset value as of today.

As a result of the legislative changes from April 2019 which Simon has explained a few minutes ago, non-UK resident landlords are now brought within the scope of UK tax on chargeable gains.  So using this example when bidding on the shares in the target company this target company now has what we would call a latent uncrystallised gain within it.  That gain is calculated by taking the current market value of the asset, not the shares, so the asset value, the £133 million, we then broadly take away the value of the asset as at April 2019, we've assumed for simplicity that would be £100 million.  So there'll be a latent gain within that target company of £33 million.  A key point here is then, there is no tax at the moment within the target company itself when the shares in that target company are sold.  However, if that target company came to sell the asset one day after completion, the target company itself would have a UK tax liability and that UK tax liability will be calculated using today's corporation tax rates by applying 19 per cent current UK corporation tax rate multiplied by the £33 million gain giving a tax liability of £6.27 million which would be triggered if the target company in the future came to sell the underlying asset.  The question then arises, from a bidding and a modelling perspective, as to what the buyer should do about that.  The buyer is therefore buying shares in a target company and that target company has a latent uncrystallised tax liability within it.  There's no absolute definitive market practice, I would say so far, in relation to how the economic costs of that latent gain is split but we're increasingly seeing that shared 50/50 in economic terms between buyers and sellers.  So how would that shake out in practice?  Well, if the tax on the latent gain were shared 50/50 you'd multiply the 6.27 by 50 per cent giving you 3.135 million as a shared costs and the bidder might revise its bid price down from 140 million to 136.8 million as shown on the slide.  Now that's obviously extremely important, it's extremely important that the bidder knows that it needs to do that when making its offer to make sure that its offer is both credible and well thought through, and the seller needs to understand that because if this is where they end up commercially the net receipts by the seller are obviously reduced by reference to the fact that the latent gain has been shared in economic terms.  Now what is really, really important from a bidding and modelling perspective is if you are able to put yourself in a position where you are at a competitive advantage and you can make this latent gains problem potentially go away, at least in part, and with that in mind I'm going to pass back to Simon who is going to talk about those benefits of the REIT regime which can help in this respect and also further benefits of the REIT regime as a whole.

SS: Thank you Tim.  So the creation of a REIT to acquire the target company in the previous slide offers a solution to the latent gain issue that Tim has explained.  Why does it offer a solution?  Well it offers a solution because if you acquired that target company into either an existing REIT group or a newly establish REIT then the company obtains a tax free step-up in its base cost when it enters the REIT regime and therefore the latent gain that Tim explained was sitting there in the target company goes away.  It follows from that then that use of a REIT as an acquisition structure may offer a competitive advantage for a bidder compared with those bidders who are not using a REIT structure.  And moreover, on exit from the REIT regime, if you were to sell the shares in the target company at the end of the investment cycle, the target company would then also be permitted a tax free step-up at that point too although care needs to be taken by your purchaser to ensure that subsequent events do not cause that step-up to be lost.

Now, the legislation around REITs states that a REIT must have a minimum of three properties to qualify as a REIT.  However, this is being interpreted flexibly by HMRC at the moment and where you have a building which is subject to multiple occupational leases, and those occupational leases operate independently of each other in terms of, for example, assignment or surrender, then HMRC is willing to view each occupational lease as its own property and therefore enable you to satisfy that three property rule.  But in any case, the government are considering single building REITs, so a building that only has a single occupational lease in it as well as other adaptations and changes to the regime, and this brings me back to a point that David Jones mentioned right at the top of the webinar, that the direction of travel here is to make REITs more flexible and more attractive compared to other historic types of structure.  And we've put the link there at the bottom of the slide to the government's consultative documents where they ask for views as to how they might make the REIT regime, and indeed the wider UK funds regime, more attractive.

Okay, well we're going to stop there and we're going to handover to Crestbridge.

DH: Thank you very much everybody, Tim, Simon, David, Argie, very interesting market and technical insights there, and a good refresher for me as a former Tax Partner myself and a little bit of a trip down memory lane, so thank you for that.  And my name is Dean Hodcroft.  I'm the CEO of Crestbridge Group and we have a very strong Real Estate and REITs practice, something of an area of specialism and expertise for us.  And I'm joined today by a couple of our colleagues to discuss the practical aspects of REITs.  Starting with Ana Kekovska who is head of Corporate Services and also Simon Todd who is our head of Real Estate.  So before extending the discussion into practical matters we thought a quick REITs refresher would be useful.  So Ana is going to take a couple of minutes to do that before we then move into a more practical Q&A session.  Ana over to you.

AK: Thanks Dean and good morning everyone, it's great to have you all with us this morning.  Well so I've put up a slide here that looks a little bit basic.  I thought it'd be really well worth spending a few minutes to not only provide a reminder of the key elements of the UK REIT regime but also to share our insights from recent experience in working with our clients, particularly in the establishment and running of their REIT structures.  Ashurst covered a number of their key advantages to REITs providing for efficient tax structuring and elimination of latent gains but the value of the REIT brand itself shouldn't be underestimated in terms of the advantage it provides.  It's widely recognised and goes a long way to attracting international capital to the UK real estate market.  The REIT brand's particularly attractive to institutional investors into the pension funds, the insurance companies and sovereigns.  And almost all of the private REITs we've seen over the last few years have certainly fallen within this camp.  In our experience it's the pension funds and sovereigns that are most regularly taking the private REIT structure as the route to investing in UK real estate.  And in a few cases we've even seen JV-style REITs with a combination of those investors clubbing together and involved from the outset in relation to investment in substantial UK assets.  In general REIT structures are relatively simple, corporate structures, they're very well understood by investors.  A little bit less frightening than JPUTs to some international investors.  The trust concept could sometimes be a little bit more challenging to the international market.  So a corporate structure is usually a very attractive place to start and with its simplicity it's certainly most attractive to investors.  Most of the REITs we see are established either as UK companies or Jersey companies.  And whilst both are very similar in legal arrangements, the Jersey law companies do offer a greater level of flexibility, particularly for distribution with relatively straightforward cash-based solvency test of the distributions.  Jersey companies can also satisfy the requirement to be UK tax resident which is achieved through management and control principles and having a UK resident board meeting regularly in the UK and making its decisions there.  Again that works extremely well for managers who often have representatives on the board but actually the board is usually comprised of NEDs and the experience in the real estate sector in the NED space is substantial in the UK so it works really well.  Jersey companies are also often used for access to the flexible fund options available offshore.  In our experience the unregulated fund is the favoured option where there are a smaller number of institutional investors in the REIT.  It's very much a light touch regime, compliance is mostly focused on AML.  The UK funds regime is far less friendly at the moment, though Simon earlier touched on the consultation that's ongoing with HMRC in his presentation on the reforms that are being considered.  So it would be interesting where that ends up, to see where that ends up.  Not to say that Jersey's always the right answer for the corporate structure and we've seen recently, particularly in the public REIT space, an incidence of clear aversion to being offshore and it's usually due to pressure from NGOs and other groups relating to one or more of the investors and often we can see that the pension funds are seeing a little bit of pressure there.

A choice of stock exchange is another key decision that needs to be made early on in the structuring of the REIT.  Usually, in our experience, it's a choice between the London Stock Exchange and the International Stock Exchange.  Interestingly the International Stock Exchange recently published a statistic that it's now home to more than 40 per cent of all UK REITs.  In our experience it's certainly the exchange of choice for the private REIT structure.  The International Stock Exchange offers an exemption from having a 25 per cent free float which requires 25 per cent of issued capital to be held in public hands.  And most importantly it's cost effective route is a fast route to listing and in our experience it can be as quick as six weeks from initiation to listing.  At the other extreme the London Stock Exchange market listing for a new REIT co would be a minimum of six months with extensive requirements to satisfy the admission process.  It is however the market of choice for public REITs providing access to the widest range of investors.  Interestingly what we do see from time-to-time [inaudible] establishing private REITs initially with a small and known investment base upfront, listing on the International Stock Exchange but with a clear strategy to transition to a public REIT on the London Stock Exchange within three to five years.  So effectively they're building in an exit strategy right at the outset.  And we work with them right from the beginning to build a governance framework that will support the smooth transition from a private REIT structure to a pubic REIT structure when the time comes.  Having said that, we haven't actually seen a transfer of the listing yet but it would be interesting to see how that plan's evolved and actually how that process works in terms of attracting new investors to the REIT.  Fiona, can I ask you to move onto the next slide please?

The REIT journey for a private REIT listing on the International Stock Exchange will always be a lot more straightforward.  Usually we'd work with our clients to incorporate a value REIT co which in itself simplifies the listing process with no track record, the prospective is relatively formulaic.  There are usually no marketing or capital raising processes to be involved with either.  In private REITs it's often the nature of the underlying asset that can drive some of the complexity within the REIT conversion process.  Particularly in this market there are clearly a number of sectors feeling the pinch at the moment and we're seeing distressed assets with a need to restructure prior to conversion.  Usually that's to reduce financing, often by converting some of the debt to equity in order to meet the finance costs for the rest of REIT .  In a very recent and live case that we're working on the REIT application to HMRC has also included detailed strategic and financial plans to demonstrate how the REITs will become compliant following turn-around efforts in the initial period where HMRC may be granting some leeway from the REIT rules particularly in relation to distributions in the finance cost ratio.  Once the REIT is lodged the management board usually look to us to hold their hand and provide support to ensure the government's framework's is in place.  The REIT and listing rules are monitored and managed.  For  a first time user of the REIT regime, in the early days we find ourselves working very closely with the board and the manager to establish that framework for governance and reliance.  There's a huge reliance on us to drive the routines but also the necessary elements allowing both the board and the manager to focus on maximising value for the shareholder.

Fiona, next slide please.  Which takes to the million dollar question.  It's usually way up high on top of the list in terms of REITs when we're asked what happens when they're live and it's always what will it cost to run the REIT, please give us a ballpark figure and of course my answer is always, "Well it depends".  So I try to provide two extremes to the REIT profile both from the private REIT side and then the public REIT side.  A private REIT, imagine a single pension fund or sovereign investor for Jersey companies listed on the International Stock Exchange, very much a private structure, and it has a stable asset with a relatively simple corporate and ownership structure, minimal board meetings, infrequent distributions usually only annual, half-yearly financial reporting, un-routine market announcements.  The governance and financial reporting costs for outsource solution would be in the region of approximately £50,000.  And in addition you will obviously also have ongoing relationships with advisors, not only the manager but also your legal advisors, and you'll still have the costs of independent directors and auditors to meet there as well.

On the other end of the scale you have your public REIT, you have your multi-asset Plc listed on the main market in London, really an average annual governance and financing reporting costs would start in the range of £220,000 to £250,000 and that's without the extensive advisors surrounding a full listing.
So across the spectrum there's everything in between and the level of support needed will really be driven by the needs of the manager, the investors and of course the selected market and applicable laws.  And Dean with that, I'll hand back to you.

DH: Thank you Ana, that's a great refresher and helpful backdrops and a few practical questions.  So back to you, Ana, when clients approach you to set up a REIT, what is the first thought that comes to your mind?

AK: Usually I have a long list of questions.  I want to know who the manager is.  I want to know who the investors are likely to be.  What the underlying asset might be.  Whether we're looking at a public or a private REIT.  I really want to understand how developed and advanced the thinking is around the proposed structure and the listing needs.  I'm also keen to understand what support the manager needs in the listing process itself and potentially some pre-listing processes if there's a REIT structuring need so we can step in, share our experience of common pitfalls but also provide the support that's needed in the most effective manner.

DH: Okay so really understanding the commercial context is crucial.  And aside from the REIT rules of themselves what are the other regulatory issues?

AK: A REIT, whether it's public or private comes with various layers of regulation, the relevant company law, anti-money laundering and investor due diligence responsibilities, requirements of the applicable fund regime and of course the listing rules, the codes of governance, the market abuse regulations.  The list can be quite daunting and the responsibilities fall on the board and the manager and really it's our role as the company's secretary and the administrator to provide a framework in place to make those matters routine for the board and really to lead the board and the manager through navigating the regulatory and compliance landscape and making sure they have the infrastructure in place to keep them safe throughout that structure, allowing them to concentrate on the asset itself.

DH: Okay, fabulous and before turning to Simon Todd with the next one, what else, Ana, should the REIT manager be thinking about in the first 90 days after the joy relief and champagne that follows set up?

AK: Definitely relief.  The REIT conversion and listing process can be extremely time pressured and the challenges that managers place on themselves to meet very tight deadlines can now take a lot of strain and, you know, there are multiple workstreams and certainly a lot of paperwork and documentation involved.  With a cycle of quarterly board meetings the manager really needs to get into a business as usual position as quickly as possible following the launch.  They need to refocus on the asset but also align with all the new corporate governance requirements that a listed REIT demands.  The recent REIT failures that have been reported has been due to poor corporate governance so the element really can't be underestimated.  And that's where we work really closely with the manager, holding their hand, leading on the governance and reliance elements for them.

DH: Presumably you have board meetings, thinking ahead, management accounts and so on, we can help with all of that stuff?

AK: Absolutely, all the planning, all the structure, we do there.

DH: Okay, great.  Simon, over to you.  You sit on a number of boards within REIT structures, what do you see as the practical issues to consider?

ST: Maintaining the REIT regime requirements are vitally important.  You don't really want the mechanics of ruling the REIT getting in the way of managing the primary asset when you [inaudible].  I think reiterating some of the things that Ana was saying in [inaudible] is ensuring that you set it up correctly in the first place, you got the correct advice.  One of the things that we've seen time and time again on these is ensuring that within that 90 day period that there's a review of the business plan and that that business plan is strong and robust, it's discussed and understood by all the parties and that anything that has fallen out in the transaction stage in those early days is put back into the business plan to ensure that you are hitting all those appropriate hurdles for the REIT regime.  As well, just going back to what Ana said there as well, having the right procedures and protocols in there so that there is mechanics that the board and the board members can see at each of the board meetings to ensure that the KPIs of managing the regime are in place.  And education, as Ana in her presentation said, it's easily sort of understood from a, I think, similar, depending on who you are in the process of managing that asset, it's easily sort of understood by some areas, some of the requirements to manage the REIT aren't always these appreciated.  So early education of all the parties who are going to be advising the board, I think is important. 

DH: Okay thank you Simon.  And just quickly because I know we need to get back to general questions from the audience.  In your experience, in a sentence, how do REITs compare with other popular structures such a JPUT?  Not easily answerable in a sentence but [talking together].

ST: It's the right asset.  Yeah you latch the asset to the investor and the asset plant to the nature of the structure that you're going use from there.  But they have their merits.  Sorry that's not a sentence, is it?  I think to sort of summarise, gone are the days where REITs are just vehicles that are large PropCo's.  They're a multi-news vehicle now.

DH: That's a great summary, thank you very much Simon.  And with that I'll hand back to David to oversee the general Q&A.

DJ: Excellent.  Thanks very much, Dean.  Thank you to all the panellists as well.  That was really informative and we've got a lot of questions through from the audience, so thank you all for that.  It's great to see such a really high level of interest in this area.  So I think first we'll go Argie and Argie, the question from you that has come in is, so in the current market what recommendations would you give to investors coming into the UK or even recommendations for existing landlords in the UK?

AT: David, thanks very much.  Thanks for the question.  I'm not going to give away my trade secrets, David, unless I have a retained buy side mandate to the suitable fee level.  But rather than going into a long detailed answer, I would suggest all investors take ESG very seriously.  Okay, I'm sounding like a parrot repeating myself on that one.  But fundamentally the occupiers are taking it very seriously.  Lenders are taking it very seriously.  Why?  Because governments are now beginning to take it seriously.  So therefore if you don't take it seriously all you're doing is either going to miss the boat or you're going to have assets which become obsolete quicker.  The second area I would suggest investors, and this is something where Cushmans, as a leading global advisor, are at the coalface, is occupier trends.  Really, really take it seriously.  They are evolving faster now than anyone could've ever predicted and fundamentally that's where Cushmans, being at the coalface with our global network would love to help people.  So those are the two areas, occupational trends and ESG.  Hopefully that helps, David.

DJ: Great.  Thanks, Argie.  Actually I was waiting for some new trade secrets there, but never mind we'll get that on the deal.  And then the next question that's come in.  I think for Simon, which is do you think we will see truly private REITs in the future,  i.e. will they remove the listing requirement?

SS: Well thank you and that's a good question.  I think it's very likely.  The reason why I think it's likely is because it is specifically one of the areas on which the government is inviting views in that call for evidence document, the link for which we put up on the slides.  And in my experience if that issue was off the table, if it was non-negotiable, if it was not going to happen, if the government had closed their mind to it, then they wouldn't be asking for people's views.  The fact that they are means that it's a real possibility I think. 

Actually David, I can see that there's another question which I think perhaps you might be actually best placed to answer.  And I think this is a very good question.  So I just wanted some pen here.  In one of Tim Gummer's slides, he explained that the discount for the latent gain was 50% of the latent gain.  But the question that's being asked is what do you see as the market norm or the market standard discount that's agreed where there is a latent gain between seller and buyer?

DJ: Right.  Okay well I think perhaps start with Europe because Europe has been doing this for a lot longer than we have.  And Europe, the traditional position is 50/50 unless you are up in parts of the Nordic where it may be 75% towards the buyer.  And the UK has never really turned its mind to this because we didn't have CGT for most international investors before 2019 but we've sort have been inventing it [inaudible].  And quite rightly, I think we're really adopting the European model at 50/50 and that's really what we've seen.  We've seen people pushing in different directions as the market settles around it, but I'd say it's really where we're sitting. 

Right.  What other questions have we had?  But that's for Ana and the Crestbridge team.  Have the uncertainties created by COVID highlighted any particular strength or weaknesses in the restructure?  And I think the question there is thinking particularly in terms of the requirement to distribute during a period when cashflow may have been limited, asset managers might want to retain some income in the structure for future uncertainties.

AK: Thanks, David.  I guess even at the best of times the rateable condition methods take very careful financial management forecasting.  And in some real estate sectors clearly we've seen rent collections have been challenged and are still challenged in some areas.  And REITs don't generally hold huge cash reserves as a requirement to distribute 90% of rental profits and, you know, is there and needs to be complied with.  And, you know, it can still leave a REIT at risk of insolvency even once rent collections and rent write-offs are taken into account in the profit calculation.  So careful management is essential.  HMRC, has it been minded to offer any blanket concessionary treatment in respect of the distribution requirement in light of COVID therefore reconsidering, deferring or not paying property income distributions to really engage early with HMRC to discuss if any discretionary treatment might be available to them.  There are of course other options.  In November last year you may have seen that Hammerson announced it would offer an enhanced scrip dividend page in shares to investors.  And that enhanced scrip dividend was 2 p per share compared to its cash dividend of 0.23 p per share.  So clearly there was an intention there to make the scrip terms extremely attractive to investors thereby helping Hammerson to retain cash during the COVID crisis and it was definitely a prudent approach taken by the them.

DJ: Thanks Ana, that's really interesting.  Thank you for that.  Let's go to Tim next.  Tim, so do REITs get any special treatment in terms of SDLT when they buy assets?

TG: Many thanks, David.  Again it's a good question because during the course of this presentation today Simon, Ana and I have set out the benefits of the REIT regime.  But I think it's really important to note that they're not an entirely tax free vehicle so a REIT will pay SDLT and VAT in the same way, for example, as a "normal" tax payer.  So in answer to the direct question, no, there's no special get out from an SDLT perspective but all of that has to be factored into the overall modelling of the transaction that has been contemplated and the potential use of a REIT at an attractive investment level.

DJ: Thanks, Tim.  And then back to you, Simon.  Can a REIT have a shareholder who owns ten percent or more of the REIT?

SS: Now that's a good question.  It can have a shareholder who owns more than ten percent of the shares.  But there is a rule that one cannot make a distribution to shareholders who have ten percent or more and there's a way around this, and a very common accepted way around it, that you would use different companies to hold the shares.  So for example, if you had an investor that, for example, and Ana mentioned earlier joint venture REITs.  Let's say you had an investor that wanted to have 40 percent of a REIT, or just under 40 percent, that they would come in and they would hold the 40 percent through four different companies or perhaps five different companies.  Each one has just under ten percent and that's perfectly permitted and is the common workaround the solution for that issue.

DJ: Brilliant.  Thank you, Simon.  Thank you.  And perhaps back to Ana and/or Simon or Dean, so there's currently a lot of focus on repurposing assets plus investors looking at a development hold strategy with the aim at increasing overall returns.  So the question is asking, can the REIT structure accommodate a redevelopment or refurbishment period when positive cashflow is really limited or non-existent?

AK: Shall I take that?  Really REITs aren't very easily accommodating for development costs and there are some specific rules for the development.  Often what we see active for development is undertaken separately prior to conversion to REIT.  Where there is a substantial element there are some allowances there for development within an existing REIT structure and there are limits in terms of the value of the development compared to the fair value of a property which is set at about 30 percent and there's also restrictions on disposal of a developed asset within three years of completion of the development and should that be breached then you're looking at that development element being taxable.  So really there are some challenges there in terms of development and that also need to be very carefully managed.  

DJ: Thank you.  That's really helpful.  And then I think back to Tim.  Let's do one more question.  I think we're getting close to 10 o'clock, before 10 o'clock UK, before we wrap up.  So, Tim, can REITs hold residential property, is the question?

TG: Thanks, David, I'll be very brief because I'm conscious time is tight.  The answer is definitely yes.  They're very flexible with regards to what REITs can and do hold.  So Build to Rent, student accommodation, offices, logistics and they can hold a very broad suite of different asset classes.  So the answer to that is a resounding yes.

DJ: Brilliant.  Thank you.  I think we're getting close to the hour so thank you to everyone who's joined today.  Thank you to the panel for your excellent presentation.  It was incredibly useful.  Thank you very much.  So we do hope for everyone in the audience this has given you some ideas into the current trends that are going on in this niche in the moment, also how to use those to get yourself a real advantage in a very tight market, as it has been taught.  So please do get in touch if you would like to discuss any aspects that have been talked about today. And I wish you all a great rest of the day wherever you are in the world, so thank you very much indeed.