NAREIT - Special Issue

Francis W. Salway was appointed Land Securities Group chief executive in July 2004. He joined Land Securities in October 2000 as head of its portfolio management team with responsibility for the Group’s investment portfolio. He then headed the Land Securities Development team from May 2002 with responsibility for the company’s development program throughout the U.K. before taking up his current role.

Prior to joining Land Securities, Salway was an investment director at Standard Life Investments. In the mid-1980s he conducted research at the College of Estate Management, culminating in the publication of a book entitled “Depreciation of Commercial Property.”

Passing U.K. Reit legislation was a breakthrough moment. Now that reits are available in the u.K. market, what is the main draw for local and foreign investors?
There are several factors that are appealing about investing in U.K. REITs. The U.K. economy is strong, competitive and open, and for many years it has shown a slightly higher gross domestic product (GDP) growth rate than other European countries.

The U.K. is becoming the center of the European REIT industry. With a market capitalization for REITs and other quoted property companies in the U.K. of $85 billion, the U.K. represents 8 percent of all globally listed real estate. All other European countries combined account for just over 6 percent.

The U.K. has one of the highest levels of liquidity and transparency of any commercial real estate market in the world and is very open to overseas investment. This means good prospects for rental value growth across all real estate sectors, particularly in the London office market. The U.K. office market is particularly strong, especially with London as one of the leading financial centers in the world.

Going forward, there should be slightly above-average growth trend in rents. For those wishing to make an investment in commercial property in the U.K., there is relatively easy access to the market.

January 2007 saw a jump in U.K. REIT share prices, followed by a steady decline. What were the reasons for the downturn?
The formal REIT introduction in January happened after a period of approximately four years of phenomenal growth in commercial property values. Purely by coincidence, the timing of the REIT launch coincided with a stage in the cycle when investors were anticipating a slightly slower rate of growth in U.K. commercial properties. Additionally, increases in interest rates had an influence on the market, resulting in a repricing of quoted REITs and real estate companies in the U.K.

REIT structures are an effective way of investing in listed real estate, especially for the long-term. The U.K. economy is strong and the market will benefit from the REIT structure.

Are there gaps in the new legislation that need to be resolved?
There are many aspects of the new legislation that work extremely well in terms of giving REITs business flexibility, such as the ability to undertake development and to sell assets without having to distribute the capital gains. There is also the ability to have up to 25 percent of the business in non-property rental activities which do not qualify for tax exemption.

The one aspect of the U.K. REIT legislation that has caused some uncertainty and confusion is the “10 percent shareholder” ruling. Initial indications were that a shareholder owning more than 10 percent would invalidate REIT status, but the final legislation stipulates that a shareholder owning more than 10 percent either must arrange for “dividend stripping” or must not be entitled to receive the dividend.