Sir George speaks out on investment in homes for rent
5 Jul 2006
Speaking during the Report Stage of the Finance Bill, Sir George spoke to an amendment to make it easier for quoted companies to invest in housing for rent.

See Hansard extract below:

Sir George Young (North-West Hampshire) (Con): I commend my hon. Friend the Member for Rayleigh (Mr. Francois) on his eloquent advocacy of amendment No. 130. I was delighted to hear that his arguments have struck a cord in other parts of the House. I agree with what the hon. Member for Dundee, East (Stewart Hosie) said towards the end of his remarks about getting a healthy residential market on its feet.

I want to speak briefly to amendments Nos. 60 and 61, and I refer again to my entry in the Register of Members’ Interests. Although it is not a registrable interest, I was also a member of the Oxford University Conservative Association, although the impact that I made may have faded by the time the Economic Secretary signed up a few years later. This is the fourth and penultimate time that I will speak in the Finance Bill proceedings on real estate investment trusts. Let me summarise where we are. There is a background of an all-party consensus on the need for a new investment vehicle to promote investment in residential property, attracting long-term institutional funds, broadening the market, giving a wider choice for those who want to rent and enabling private and institutional investors to get exposure to the residential property market that they do not have at the moment.

When the Government came into office, there was an all-party consensus that we needed an initiative. The Government took the debate forward and I give them credit for that. We had the Kate Barker report and then, in March 2004, the Treasury consultation paper. In paragraph 1.14, it said that a REIT

“structure in the UK would therefore set a challenge for the industry to encourage development of new housing, which managed within”

a REIT structure. The paper went on to say:

“Improvements and expansion to this sector”—

the private rented sector—

“could enhance efficiency and flexibility in the housing market.”

It continued:

“The Government is keen to encourage greater renewal in the property sector, and the development of new...residential buildings”.

Finally, it stated that the Government were keen for a REIT

“to stimulate greater development activity in the residential market providing a vehicle into which new properties can be converted and managed more efficiently.”

There is no disagreement on either side of the House about those objectives. The debate in Committee was about whether those objectives would be achieved with the regime that is before us. We had a constructive and, by and large, consensual debate. We established that there was domestic harmony between the Economic Secretary and the Minister for Housing and Planning on the approach to REITs and that the framework for our debate was what the Chancellor said in his Budget speech:

“To attract more capital into house building, we are now legislating to introduce for Britain the real estate investment trusts that are so successful in the USA.”—[ Official Report, 22 March 2006; Vol. 444, c. 293.]

I want to bring one or two points from the debate to the attention of the House. The Economic Secretary was asked what went wrong with the previous initiatives and he replied:


I suspect that he meant me—

“will probably agree that the regime did not work; in our view, it was too prescriptive and insufficiently flexible and thus did not attract capital.”

There is some concern that the new regime may have the disadvantages of the regime that he criticised in that debate. He went on to say:

“We are trying to deliver a regime that will be more flexible and more appropriate for residential property investors.”

I will come to that in a moment.

The debate spanned a morning sitting and, as my hon. Friend the Member for Rayleigh said, a rather warm afternoon sitting. Again, I want to pick up on some of the key points of that debate. The Economic Secretary said that he fully supported the

“objective of encouraging further investment in residential property.”

We probably pushed him right to the limits of his negotiating powers by extracting from him a general undertaking that if things did not go as he hoped, he would have another look at the matter. He did not go quite as far as we all wanted, but at the end I withdrew the relevant amendment, saying:

“The Minister is a reasonable man, and he went as far as I suspect his brief allows him to go in giving the undertaking. Without prejudice to the possibility of bringing back on Report a related amendment...I beg to ask leave to withdraw the amendment.”—[ Official Report, Standing Committee A, 8 June 2006; c. 479, 503, 509.]

I remind the House that there is enormous potential here. I understand that there is a proposition to build the Olympic village through a REIT. There is also the possibility of using REITs to provide student accommodation and other opportunities. However, the key question is whether we will have the correct regime. My amendments Nos. 60 and 61 approach the problem from a slightly different angle from the one that I moved in Committee. They would amend clause 112, which introduces the entry charge, or conversion charge, which is the entry tax that one must pay if one wishes to become a residential REIT.

It is worth bringing to the House’s attention the fact that the entry charge, or conversion charge, was not a feature of the regime initially proposed by Kate Barker, who focused on residential REITs. The conversion charge came on to the radar when the concept was extended from residential REITs to commercial REITs. By converting to a REIT, a quoted company will avoid capital gains tax liabilities, so to defray any possible loss of revenue, the Government decided to introduce a conversion charge to compensate the Treasury for the prospective loss of finance. I have no difficulty with that as a concept. In my view, the charge was set at a generous level, and the Minister explained how it was calculated. When the announcement was made, the market was pleasantly surprised.

Although a conversion charge might be appropriate for a commercial REIT, I argue that it is wholly inappropriate for a residential REIT. We have established that no quoted residential property company is likely to convert, so a residential REIT will have to start from scratch. In an earlier intervention, the Economic Secretary referred to 17 housing associations that are forming a consortium with a possible view to converting to a REIT. If one examines the model that that consortium will have to follow, there are severe disincentives to adopting the REIT structure.

The first thing that will happen when a housing association wants to put its residential properties into a residential REIT is that it will have to pay capital gains tax on any profit from the disposal of those properties. That will crystallise a capital gains tax liability that would not have been there otherwise. Capital gains tax will have to be paid on any properties transferred from the existing portfolio to a residential REIT. Secondly, stamp duty at 4 per cent. will be payable by the REIT vehicle on purchase, and, thirdly, the REIT will have to pay a 2 per cent. charge on conversion. Those are serious disincentives before any new supply is created. If the objective is to establish a more benign fiscal regime, it is absurd to start by expecting a residential REIT to pay three taxes that it would not have to pay at the moment.

I shall outline what has gone wrong. The original regime was aimed at residential REITs, but that has been transferred to cope with commercial REITs, so that regime is simply inappropriate. The Economic Secretary is frowning, but those three taxes—capital gains tax, stamp duty and the conversion charge—will be payable before a residential REIT gets into the business of providing new homes, which is the object of the exercise. In a sense, the commercial property companies have become the cuckoo in the nest. The
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nest was originally designed for residential REITs, but the cuckoo has come along and displaced the original occupant—the residential REIT. Unless the Minister makes a concession today or at a later stage, I am worried that the hurdles that will confront— [Interruption.] I will happily give way if the Minister is about to indicate that he will accept my amendments, or indeed waive some of the taxes to which I referred.

Ed Balls: Is the right hon. Gentleman really saying that the British commercial property sector, which is renowned nationally and internationally for its efficiency and strength, is a cuckoo?

Sir George Young: I am slightly sorry that the Minister has taken so seriously the analogy that I was trying to convey to the House. In Committee he displayed traces of humour, which we enjoyed. I am sorry that that is the best response that he can produce to the rather serious case that I was making, which is that the regime—or the nest, if he does not find that reference offensive—most appropriate for the commercial sector is not appropriate for the residential sector. There is an offshore alternative to UK REITs, which the Treasury should not ignore.

I hope that the Economic Secretary will reflect on the fact that there are some serious hurdles to overcome before the residential REIT gets going. I also hope that, when he winds up the debate he will exhibit some flexibility—and possibly some humour—in his response to my case, which I have made against the background of the model that will be used by the very housing associations that he mentioned earlier.

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