1 Hotel cover.indd - Nicola Cottam

● Residual (non-property investment) business continues to be taxed at 30%, and must represent less than 25%
of the REITs total profits and less than 25% of the REITs gross assets (the balance of business test).
● Generally, shareholders are taxed at 22% on distributions, to mirror direct property ownership.
● One-off entry charge of 2% of the market value of properties being transferred into the tax-exempt business.
● Sale of property from the tax-exempt business of a REIT is exempt from capital gains tax.
● Owner-occupied property is excluded from the tax-exempt business.
Initial Impact
Initially, nine UK property companies converted to REITs from 1 January 2007 and a handful of other companies
have either confirmed they will convert or intend to convert during 2007.
At present, however, UK hotel groups have been put off from conversion. The key issue appears to be the restriction
on owner/occupiers converting to REITs. Additionally, even if the restriction on owner-occupied property
was lifted such that it could form part of the tax exempt property rental business, hotel owner/operators may still
struggle to satisfy the 75%/25% balance of business test. It seems that currently the only way for hotel operators
to convert to REITs in the UK would be to separate the assets from the running of the hotel.
What does the future hold for UK REITs?
Many analysts are excited by the growth potential for UK REITs.
Worldwide, 2006 was a great year for the REITs market. In the US, REIT prices have been boosted by a number of
large privatisations and outpaced the broader domestic markets for a seventh year in a row based on S&P figures.
The market in Asia continued to grow, whilst in Europe the introduction of REITs in the UK and Germany in
2007, with Italy to follow in 2008, has created a positive environment in the sector.
The launch of UK REITs is expected to lead to a surge of interest in the property market as REITs become as popular
an investment asset as equities and bonds. However, fund managers Fidelity International are more cautious in
their outlook and predict that it could take up to 30 years for the UK REIT market to mature and diversify based
on the evidence of countries like the US and Australia.
More to come
Key Issues: Real Estate Investment Trusts: An Overview
After the introduction of the UK REIT rules, making the split between operators and property owners continues to
be a logical and cost-effective decision – enabling both groups to focus on what they do best. The lodging industry,
once considered less attractive than other types of commercial property, has seen record levels of activity from
investors looking to buy hotel properties.
March 2007 Hotel Report Guide to UK Hotels l © William Reed Publishing 34