UK REITs: where are we now? (2024)

What are REITs?

UK Real Estate Investment Trusts (REITs) are one of the most popular UK property investment vehicles. REITs can benefit from UK tax exemptions on income profits and capital gains from property investment activities, an increasingly valuable benefit given the recent increase in the main UK corporation tax rate from 19 per cent to 25 per cent.

Other than some minor changes to cater for the expansion in scope of UK tax on property income and gains in “property rich” vehicles (see our article here), the UK REIT regime has remained largely unchanged since its introduction in 2007. This has historically limited the use of REITs to substantial listed investors with diverse UK commercial property portfolios.

Recent changes

Following consultation on the wider UK funds landscape, the government has recently made some key changes to the REIT regime aimed at broadening its appeal to investors. These include:

• Removing the requirement for REITs to be listed where institutional investors (such as pension schemes, OEICs, charities and certain non-UK equivalents) hold 70 per cent or more of the REIT’s shares.
• A relaxation of property-ownership requirements, so that REITs no longer need to hold three or more properties if they hold a single commercial property worth at least £20m.
• A technical relaxation of rules relating to property development, to allow REITs to use more generous values in determining the extent of their development activities.
• An amendment to rules concerning income distributions, to allow REITs to pay income to certain partnerships without deduction of withholding tax.

These changes open up UK REITs for large single-asset property investments (for example, in single-tenant warehouses or offices) and they remove many historic barriers to REITs redeveloping older property (which in turn helps promote ESG investment by supporting environmental retrofitting initiatives). Overall, institutional investors will now find UK REITs more attractive as a property investment vehicle than ever, with many historic barriers to entry having now been removed.

Where next?

While these recent changes are a welcome starting point, further changes to the REIT regime may be made to further encourage their use by property investors.

For example, UK REITs are not typically suitable for non-UK property investment yet, meaning that investors wishing to diversify their real estate exposure across multiple countries in a single vehicle may look to alternatives. Similarly, UK REITs remain unsuitable for investing in many infrastructure projects, including in relation to renewable energy.

Removing these remaining barriers could make UK REITs more attractive as an investment vehicle and could better support investors’ ESG priorities. It remains to be seen whether the government will build on these most recent changes to further open up the UK REIT regime, but if they do, this could attract entire new classes of investors to UK funds.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circ*mstances.

© Farrer & Co LLP, June 2023