1 Hotel cover.indd - Nicola Cottam

Key Issues: Real Estate Investment Trusts: REITS and the Challenge for Hotels
Real Estate Investment Trusts:
REITS and the challenge for hotels
by Mark Nichols, Tax Partner, Hotel and Leisure Group, CMS Cameron McKenna
REITs have been with us since 1 January 2007. Peter Hackleton’s article earlier in this Guide gives a more general
overview of the new regime. This article focuses on some hotel specific issues that arise from the new rules.
Since 2 January 2007 we have seen considerable press comment on the new regime both favourable and unfavourable,
both optimistic and doom-laden. Although the regime is now in place, it is amazing how much of detail is
still up in the air. Still, the most important thing for Government was that the largest property players convert to
REIT status to ensure the introduction of the regime is a success and, of course, to raise £1bn+ for the coffers. Both
of these goals seem to have been achieved. Indeed, the advantages of REIT status have proved so great that we saw
even before 1 January 40%+ growth in the share prices of those companies intending to convert into REITs.
As the market and investors now pause for thought in the New Year, that is exactly what the hotel sector needs to
do before itself succumbing to REIT fever.
For hotel REITs, the fundamental dangers that commentators have warned about over the last 18 months remain
in place. While a portfolio of leased hotels seems a perfect target for a REIT, particularly an existing property
company looking to diversify and to seek higher yields, we need to consider a number of questions. Are hotel
REITs possible? How can we deal with portfolios where the operator only wants a management contract? How
does the legislation work in detail for group REITs or REITs with an Opco as a subsidiary or joint venture? Can
new REITs be set up effectively for hotel specialist investment?
Until we have answers to these questions as well as to the wider issues of whether REITs are suitable for the hospitality
market, the hotel sector must move with some caution. Who can forget how former Chancellor Lawson’s fire
sale of dual mortgage relief in 1988 triggered or at least precipitated the crash in residential properties values?
One thing is for sure: REITs will be looking for maximum income production from their assets. Forget about capital
allowances and their ability to reduce the minimum distribution requirement and increase the tax efficiency of
dividends for some taxpayers. Nothing must touch the sacred profit and loss account – the US model has shown
that expectations of income returns by investors are high and tend only to grow. REITs are seen as high yielding
alternatives to gilts or bond issues and not so much as property plays, although a bit of capital gain will obviously
help to smooth out any income glitches.
March 2007 Hotel Report Guide to UK Hotels l © William Reed Publishing 36