1. Real Estate Investment Trusts (“REITs”)
Presentation in conjunction with the London Stock Exchange
PRIVATE & CONFIDENTIAL
June 2012

2. Index
1. What is a UK REIT – prior to the Finance Act 2012
2. Summary of old versus new REIT legislation
3. Opportunities for business
4. About Sapphire Capital Partners LLP
5. Contact information details
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3. What is a UK REIT – prior to the Finance Act 2012
Summary of current UK REIT regime:
 The UK REIT regime was introduced by provisions in the Finance Act 2006 and came into force on 1 January 2007.
 A UK REIT comprises a group of companies carrying on a property investment business in which properties are let to
third party tenants.
 A UK REIT benefits from an exemption from UK tax on both rental income and gains relating to its property
investment business.
 Currently the REIT must pay an entry charge of 2% of its gross assets (market value before debt) to enter the regime.
 On an ongoing basis, the REIT business has to meet certain tests and the REIT is required to distribute 90% of its
rental income in respect of each accounting period in order to obtain exemption from tax on its rental income.
The Current Legal Form:
 A UK REIT can be a group of companies with a parent company (or a single company listed REIT, although none
currently exist). Parent company must be a closed-ended company.
 The parent company can be incorporated anywhere outside the UK but must be a UK tax resident and listed on a
recognised stock exchange.
 The parent must own at least 75% of the shares of a member of the group (“75% subsidiary”). Any such member may
also hold 75% subsidiaries, but the parent must ultimately own at least 50% of the shares of all of the group
subsidiaries.
 Where a REIT holds 40% or more in a company or group that owns UK investment property, then it can also elect its
share of that company/group’s income and gains into the REIT regime.
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4. What is a UK REIT – prior to the Finance Act 2012
Capital Requirements:
 There are no capital requirements, but there is a limitation on the type of shares that the parent company of a UK
REIT can issue, being one class of ordinary shares. It can also have non-voting preference shares, including
convertible non-voting preference shares.
 There are financing requirements. A UK REIT must generate profits from its rental business of at least 1.25 times its
finance costs (e.g. interest, fees, debt break costs). There is an exemption where the REIT is suffering unexpected
financial difficulties, which was introduced in the Finance Act 2009.
 Any loans to the UK REIT should be on normal commercial terms and not provide for an interest rate that increases
with improved performance.
Current Listing requirements:
 A UK REIT must be listed on a stock exchange that appears on the list of worldwide stock exchanges recognised by
the UK tax authorities, but not the Alternative Investment Market (AIM), which is an exchange for smaller companies
in the UK (note: this is changing as a result of the Finance Act 2012).
Restrictions on investors:
 Minimum number of investors. A UK REIT cannot be close (that is under the control of five or fewer investors). At
least 35% of the shares must be freely available to the public (free float) and the remaining shareholders must not be
entitled to 85% or more of the votes.
 UK REITs are penalised if they make distributions to any particular corporate shareholder that owns 10% or more of
its shares; to prevent such penalties arising all UK REITs have amended their articles of association to prevent
payments of such dividends.
 There are no additional restrictions on non-resident investors.
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5. What is a UK REIT – prior to the Finance Act 2012
Asset / income / activity tests (balance of business tests):
 At least 75% of the UK REITs gross assets must be used in the rental business and at least 75% of the UK REITs
profits must be earned in its qualifying rental business.
 It is possible for any members of a UK REIT to have other activities. Such activities must not involve more than 25%
of the UK REITs gross assets, nor generate profits of more than 25%. Such tests are carried out using the
consolidated group results as set out in financial statements produced using International Financial Reporting
Standards (IFRS) with adjustments for non-recurring or distortive items, e.g. movement on hedging, one-off
transactions, etc.
 In summary, only rental profits and gains realised on the disposal of properties used in the UK property rental
business will be exempt from tax.
 There must be at least three properties with no one property accounting for more than 40% of the value of the REIT
assets (note, a single property which is multi tenanted such as a shopping centre will count as more than one asset).
 Property development by the UK REIT for investment on its own account is permitted, and is generally included within
the property rental business unless development costs exceed 30% of the acquisition cost (or the property’s value at
the time of entry to the UK REIT regime if higher) and the property is sold within three years of completion.
 Property trading is permitted but is taxable, and falls outside of the property rental business for the purpose of the
balance of business restrictions.
 There are no restrictions on foreign assets, may invest outside the UK in real estate wherever located.
Distribution requirements:
 The UK REIT is required to distribute at least 90% of its rental profits (being rental income after deducting finance
costs, overheads and tax depreciation). The distribution requirement can now be met using stock dividends.
 There is no requirement to distribute gains.
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6. What is a UK REIT – prior to the Finance Act 2012
Tax treatment at REIT level:
 The UK REIT must be a UK tax resident and not resident elsewhere. It is not subject to corporation tax in respect of
either rental income earned or capital gains realised in respect of its rental business assets. It is subject to corporation
tax on all other income under the usual taxation rules.
 There are no special exemption for UK REITs from value added tax, uniform business rates, employment taxes or
transaction taxes (stamp duty land tax).
Withholding tax on distributions:
 Dividend distributions out of rental income and gains by the UK REIT are generally subject to a withholding tax of
20%; however, payments can be made gross to UK companies, UK pension funds and UK charities.
 Distributions out of taxed income are treated as ordinary dividends with no actual withholding (although they carry a
deemed withholding credit of 10% where received by UK individuals).
Tax treatment at the investor level :
 Dividends derived from UK REIT shares held by individuals are subject to a withholding tax of 20%.
 Capital gains realised on the disposal of UK REIT shares held by individuals are subject to normal capital gains tax at
the individual's marginal rate (18–28%).
 Dividends and capital gains that result from the rental business and which are distributed to UK tax resident
individuals are subject to income tax at the highest rate with credit for the withholding tax of 20% which has been
suffered.
 Distribution of other income is subject to UK tax as dividend income with a deemed withholding of 10% as these would
be a distribution out of taxed profits (e.g. interest income). The individual would be subject to tax at his/her highest
dividend rate on this income less the imputed 10% tax credit.
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7. Summary of old versus new REIT legislation (due to Finance Act 2012)
Old REIT Legislation New REIT Legislation
(As a result of the Finance Act 2012. Royal Ascent expected July)
 REIT entry charge to join regime of 2% of gross assets (market value  Abolition of 2% entry charge.
before debt).
 Sapphire Comment: Should make the regime significantly more attractive due to
reduced costs.
 REIT was required to be listed on either the main market of the London  Relaxation of the listing requirement.
Stock Exchange or similar foreign exchange recognised by HMRC. Listing
 AIM market listing (and similar foreign EU exchanges) now allowed.
on AIM was not permitted.
 Sapphire Comment: REITs should be more attractive to smaller property
businesses due to reduction in costs and regulation.
 REIT cannot be a close company (i.e. under the control of five or fewer  REIT now has a grace period of three years before having to comply with close
investors). company rules.
 Sapphire Comment: close company status is highly dependent on the market
conditions – this provides greater flexibility.
 75% of a REIT’s assets are required to be investment property.  Cash is to be treated as a good asset (i.e. part of the 75% investing in property).
 Sapphire Comment: allows the REIT time to identify and acquire investments.
 Institutional investors counted as one investor for close company rules  REIT now not considered close if it can only be made close by the inclusion of
purposes even though their ownership is diverse. institutional investors (Authorised Unit Trusts, OEICs, Pension Schemes,
insurance companies and bodies which are sovereign immune).
 Sapphire Comment: provides an incentive for institutional investors to invest.
 REIT must generate profits of at least 1.25 times its finance costs.  Restricted definition of financing costs for the purposes of interest cover test.
Summary: HM Treasury hopes that the new legislation will reduce the barriers to entry and encourage
investment in REITs – especially residential REITs
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8. Opportunities for business
Proposed changes to the UK REIT regime provide an opportunity for all property investors to reconsider
whether UK REIT status would be of benefit to them.
For example:
 Banks – due to the fact that the banks are heavily exposed to property, the new REIT regime may provide an
opportunity to reduce the banks’ exposure by floating property as a REIT.
 Property companies – a REIT is now more attractive and cheaper – thus allowing a property company to obtain
value for their property portfolio by floating the property as a REIT.
 House builders – could consider putting properties that have not been sold into a REIT.
 Social housing providers – could provide the opportunity to raise new capital by putting their property portfolios into
a REIT and reinvestment in their housing stock.
 Residential landlords – this is the area of focus for the government which hopes that the new REIT regime will
stimulate the residential sector and provide much needed liquidity into the market.
 Off shore property companies – the new REIT regime will provide an opportunity for off-shore property companies
to move into a tax efficient on-shore structure without an entry cost and mitigate the risk of HMRC scrutiny if they
remain off-shore.
 Institutional investors – will interested in retaining large stakes in existing REITs or possibly investing in new REITs
in order to spin out their property portfolios.
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9. About Sapphire Capital Partners LLP
Our pitch:
We work with a portfolio of investment funds full time to provide them with ongoing investment advice. We focus on two
sectors – property and e-commerce. Our goal is to advise a portfolio of investment funds of at least £100 million by 2020.
We believe focus wins.
Our history:
 Sapphire Capital Partners LLP was formed in 2009 and is authorised and regulated by the Financial Services
Authority to act as an Investment Advisor to Funds. Our FSA firm reference number is 565716.
 Sapphire aims to supply a highly professional, efficient and personal service to its clients (primarily investment funds)
and to nurture long-term mutually beneficial relationships with clients and associated advisors.
 We believe we have a depth of knowledge that has been acquired through our involvement in the launching of multiple
funds and our fund investment advisory experience.
Our Previous Fund Experience:
 Investment Advisor to numerous property related funds, including mezzanine finance funds both in the UK and
overseas.
 Have acted as Property Advisor to AIM listed and CISX listed companies.
 Investment Advisor to tax efficient funds, such as Enterprise Investment Schemes, Unit Trusts (for SIPP/SASS) and
off shore funds (Cayman Islands).
 Worked with the London Stock Exchange in regard to advising on REITs.
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10. Contact information details
 For further information and advice on REITs, please contact Boyd Carson at Sapphire Capital Partners LLP at the
following:
 Office phone: 08 707 348 912
 Mobile phone: 07 917 767 362
 Email address: boyd@sapphirecapitalpartners.co.uk
 Or visit our website at www.SapphireCapitalPartners.co.uk
 Twitter at @SapphireCap
 For further information regarding the Alternative Investment Market (“AIM”) please contact Mark Fahy at the London
Stock Exchange at the following:
 Mobile phone: 07 795 257 517
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