To REIT or not to REIT…?
It has taken 18 months of hard work (and a fair amount in legal, accountancy and consultancy fees!) to get the position on the 21st December 2017 to finally declare that Somerset Estates Ltd has now become Somerset Estates REIT PLC. I am not going to lie, there have been times where the thought has crossed my mind to pack the whole thing in, that it was not worth the effort let alone the risk involved of converting the business my Father has spent the last 36 years slowly and methodically building up. However, I strongly believe that becoming a REIT is the way forward for the company, not only will it help us grow the business, but it will allow us to help the army of Buy to Let Landlords maintain an income from their properties which is going to be so badly affected by the new “Turnover Tax”.
Why did we decide to go down the path of converting to a REIT?
Firstly, for those who do not know what a REIT is, it would probably be useful for me to explain what they are and their benefits.
What is a REIT?
- Real Estate Investment Trusts, or REITs, were introduced in the UK on 1 January 2007 for UK-resident listed property investment companies.
- REITs must be listed on a recognised stock exchange.
- After conversion to a REIT, rental income on UK investment properties is exempt from UK corporation tax. Gains on disposals of investments properties are also exempt.
- A minimum of 90% of the tax-exempt property rental income must be paid to shareholders as a Property Income Distribution.
- The UK government continues to demonstrate its support for the REIT sector and wishes to see the sector expand further.
What are the benefits of a REIT?
- TAX EFFICIENT – REITs are exempt from UK corporation tax on all rental property income and all property disposals. This results in higher income for REITs compared to standard property companies and traditional BTL investors.
- INCOME – REITs must distribute 90% of all rental profits to shareholders. As REITs do not pay corporation tax distributable profits are higher.
- LIQUIDITY – REITs are listed companies on the Stock Market. Therefore, shares an easily traded and certainly more quickly than the property market (there is also no need to deal with lawyers and estate agents)
- EASE OF INVESTMENT – It is much easier, quicker and cheaper to invest in property via a REIT than buying a property yourself.
- DIVERSE PORTFOLIO – REITs must own at least 3 properties (we currently have 31), therefore your investment risk is spread over a whole portfolio of income-producing properties.
- MANAGEMENT – No landlord likes a call at 3 am to say the boiler has stopped working or there has been a water leak! All the properties within the REIT are fully managed by the company, therefore, there is no need to worry about managing your investment.
So…why convert to a REIT?
Since being founded in 1981 by my Surveyor Father, Somerset Estates has built up a strong portfolio of properties in London and the South East worth circa £10million and an annual rental income of £390,000. The company has low gearing and is in a strong position. However, we saw a gap in the market that will help us both expand the company and help BTL investors maintain an income from their properties despite the ongoing tax and regulation changes currently hitting the BTL market (more information on these changes can we found here (link to website page)).
We will offer landlords of suitable properties shares in the Somerset Estates REIT in exchange for their properties. This way the company can grow quickly without the requirement for large amounts of cash. In addition, landlords who chose to swap their properties for shares in the REIT will continue to benefit from a property income, however with a potentially a lower tax bill, no worries about the continuing change in regulations, or the need to manage their properties.
The benefits of a REIT are clear. However, it has not been an easy transition. Our lawyers (Taylor Vinters and Appleby Global) and accountants (Hartley Fowler and BDO) have gone over the company with a fine tooth comb (I am happy to report nothing untoward was found!) and we have had to dig up information on properties dating from the late 1800s. Hundreds of pages of information about the company and our properties have been produced, which I am happy to share with you. The whole process has taken 18 months with various false dawns and frustrations as you would expect with such a major transaction. I cannot thank our financial advisors at James Stocks & Co for their help with the whole process.
If you are a landlord, estate agent, accountant, potential investor, and want to find out more information please get in touch and I will try to answer any queries you may have.