Real Estate Investment Trusts
Brooks Newmark calls for flexibility in real estate investment trusts and argues against the requirement that they should be listed on the stock exchange.
Mr. Newmark: Real estate investment trusts, when they were originally conceived as property investment funds, were intended to stimulate investment in the residential market, as my right hon. Friend the Member for North-West Hampshire (Sir George Young) said earlier. There has been some debate over whether that objective is still feasible or whether the Government think that it is still desirable. However, whatever the main focus of REITs is to be, it is clear that if they are to be successful in this country, as they have been abroad, they must be just as flexible as those elsewhere. I believe that that is a point that my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) has been making in tremendous detail. I congratulate him on his sense of detail in addressing the issue.
The need for flexibility is taken up in amendment No. 4, which my following remarks will solely address. The decision to impose a requirement that REITs should be listed on the stock exchange has been a controversial one. The issue was discussed at length during the consultation process. The Treasury discussion paper, which was published in 2005, acknowledged that respondents had expressed widely differing opinions. Nevertheless, the Government concluded that a transparent REIT market was best founded upon a listing requirement.
It was accepted, however, that some advantages lay in allowing unlisted companies. All these benefits relate to the original justification for introducing REITs. They include the need to increase flexibility in market access by smaller or more specialised funds, especially those in the residential sector. A comparison with the US is indicative of the problems that may be caused by imposing a listing requirement.
There are about 190 REITs registered with the Securities and Exchange Commission in the United States that trade on one of the major stock exchanges. In addition, about 20 REITs are registered with the SEC but are not publicly traded. This is in contrast to about 800 REITs that are not registered with the SEC and are not traded on any stock exchange whatsoever. Listed REITs are therefore outnumbered 4:1 in the United States, which is a more mature and experienced market. I hope that the Government take that fact into account.
Statistics help to explain why commentators remain critical of the Government's decision to impose a listing requirement on UK REITs. The Royal Institution of Chartered Surveyors said:
"A successful REIT market should have both listed and unlisted vehicles in order both to allow maximum choice to investors of differing experience and size, and also to provide a pooling facility for smaller REITs to develop outside a listed market until such time as they are ready and able to go public-this should be particularly helpful for smaller players in the market."
The royal institution has simply identified the need for REITs to be able to operate in a transitional framework that helps to nurture small funds until they are ready for the increased compliance costs of a full listing. That is exactly what my hon. Friend the Member for Rayleigh (Mr. Francois) has proposed with amendment No. 4-the use of the alternative investment market as a transitional framework. The amendment is a pragmatic compromise between the benefits of increased transparency, which are brought about by imposing a listing requirement, and the benefit of lower compliance costs that come with a less regulated market. The alternative investment market was established, as we have heard, to satisfy exactly that need for compromise in the equities market. The same need exists in the real estate market. Even if we accept the listing requirement for the moment, the Government's rationale for excluding AIM is unclear.
4.45 pm
In only 10 years, AIM has become firmly established as the world's leading market for smaller growing companies. More than 2,000 companies have benefited from public listing, which otherwise would have been out of their reach. AIM has succeeded because it relies on a "simplified" and "flexible" regulatory approach. Those are both watchwords for the Government's intention for the new REITs structure, yet REITs will not be able to benefit from AIM.
AIM is not unregulated, nor does it lack the transparency that the Government seek-for once-to encourage, but it does not stipulate minimum criteria for company size, track record or the number of shares required to be in public hands. By way of contrast, a company that wishes to list on the main market has to go through the long, time-consuming and expensive process of producing a prospectus, which is now regulated by the UK Listing Authority. Companies in that position must have £700,000 in equity capital and a minimum trading record of three years. However, AIM requires that all companies that wish to list and to remain list-trading have a nominated adviser-known as a NOMAD-to see them safely through the regulatory wilderness. The pragmatic approach allows AIM to minimise compliance costs while maximising investor protection.
The Government's omitting AIM from this Bill is curious, to say the least. In 2003, the then Chief Secretary to the Treasury gave a series of written answers on AIM's regulatory status. In one of them, she said:
"The London Stock Exchange (LSE) is a Recognised Investment Exchange (RIE) under the Financial Services and Markets Act (FSMA) and has to operate all its markets, including the Alternative Investment Market (AIM), in compliance with the recognition requirements for RIEs . . . . AIM is also a 'regulated market' under the EU's Investment Services Directive".
The Government seemed at the time to be satisfied with AIM from a regulatory standpoint. Indeed, the Chief Secretary was confident enough to conclude the following in her written answer:
"Because AIM is not going to become an unregulated market, the Treasury has not done any research about the impact of such a scenario on investors and issuers".-[Official Report, 4 November 2003; Vol. 412, c. 624-25W.]
I want to return briefly to a point that my hon. Friend the Member for South-West Hertfordshire made so forcefully on Second Reading. He said:
"We must always bear in mind the consequences to our tax system when we evaluate our relationship with the EU."-[Official Report, 24 April 2006; Vol. 445, c. 446.]
He also said that being complimented by the Paymaster General might be hazardous to his career. I hope that complimenting the Government on a notable success will not be hazardous to mine. The success to which I refer was the defence of AIM during negotiations on the prospectus directive. Perhaps that success will prove that taking a harder line during negotiations in Europe does indeed pay dividends.
If the concession had not been won, AIM's ability to operate would have been undermined by increased compliance costs for firms wishing to list. Baroness Cohen of Pimlico paid tribute in another place to the Government's efforts. She said that AIM has
"been actively nurtured, given a favourable tax regime and defended from rather heavy-handed regulatory proposals, which were introduced by the European Commission in the early stages of the financial services action plan."-[Official Report, House of Lords, 16 March 2006; Vol. 679, c. 1422.]
But despite this success, the fact remains that there are currently twice as many real estate companies listed on AIM that are trading in overseas property markets as those involved in the UK domestic market.
The Bill as it stands will disadvantage the domestic real estate sector by excluding those companies and others with similar credentials from converting to REITs. My hon. Friend's amendment will ensure that the REIT structure can harness a market that is tailored to smaller and younger companies and has a streamlined regulatory regime. Instead of a REIT structure that is inclusive, flexible and entrepreneurial, we are in danger of developing one that is exclusive, inflexible and commercial. Instead of greater autonomy for small firms, we are set to create yet another oligopoly of institutional investors.
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OTHER INTERVENTIONS IN THE DEBATE
Mr. Newmark: It may be instructive to look at the United States, which has a far more mature real estate investment trust market, where unlisted REITs outnumber listed REITs by a proportion of four to one.
Mr. Gauke: That is an invaluable point and I am most grateful to my hon. Friend for his knowledge and insight into all things financial and all things American.