After the close of the consultation phase on Real Estate Investment Trusts (REITs) at the end of last week, clients of PricewaterhouseCoopers (PWC) have expressed serious doubts about the proposals as set out in the current draft legislation.

Following the announcement in the recent Pre-Budget Report of the intention to proceed with the tax rules that will enable REITs, the Government is hoped that most listed property companies would convert into REITs from January 2007 when legislation is due to come into effect.

But PWC warns that while these tax efficient vehicles for listed companies which are UK tax resident are welcomed, the findings of a recent survey it has undertaken reveal that there are concerns about the restrictions on gearing and ownership which, if not revised, could severely limit the number of companies that could qualify as a REIT.

Ros Rowe, tax partner, PricewaterhouseCoopers, said:

“REITs have been widely welcomed within the property sector but some proposed rules in the consultative document are far from ideal. I encourage the Government to consider amending those rules to ensure there is the healthy take up that all sides want.”

On a recent straw poll at a conference held by PricewaterhouseCoopers only 11% of attendees said that their companies were likely to convert to a REIT next year. A key concern was the proposed restriction on tax relief for interest on borrowings within the proposals: over three quarters (84%) of respondents said that they were concerned about this gearing level issue.

Other features of the proposals which aroused comment were the distribution requirement (which only 17% thought was reasonable) and the limitation on shareholdings to 10% or less (where 47% felt that this would constrain them from investing in a REIT).

Ros Rowe, tax partner, PricewaterhouseCoopers, concluded:

“It is important that REITs are introduced in the UK to ensure we remain competitive internationally in the property sector given so many other countries have similar property investment vehicles. I understand the concern over ensuring these structures are not abused but the framework does need to be made commercially attractive.

If there is no change to the proposed gearing restriction then I can’t see many companies moving to REIT status and that will be a considerable disappointment and a missed opportunity. I urge the Government to listen to the market and consider making the necessary changes to open the field to the wider quoted sector. This will create a liquid market from the beginning of this regime with benefits for business and the economy.”

The PricewaterhouseCoopers REITs straw poll was taken at a seminar on REITs in London on 12 January 2006 or responded to via an online questionnaire. The conference was attended by 37 representatives from the property sector, including representatives from the tax and finance function of FTSE 250 companies.