With the UK government eager to use any means necessary to bolster investment in property, the announcement of a consultation into REITs raised hopes that many of the current restrictions could be lifted to make the regime more attractive to hotels.
The Budget also included further consultation on Air Passenger Duty, in particular looking at methods to make the system fairer. However, despite extensive lobbying, a drop in VAT for room nights failed to make it onto the agenda, while concerns over the possibility of a bed tax being introduced in time for the London 2012 Olympics were not allayed.
The UK hotel sector has so far failed to successfully launch a REIT, having been burned by the Vector Hospitality effort. Many of the hotels which were to have been included in Vector are still on the market, perhaps indicating issues around the estate itself as well as the wider issue of bad timing ahead of the collapse of Lehman Brothers and subsequent crisis.
There were other problems around Vector, including conflicts of interest, which were not related to the REIT model, however, the structure has not been adopted by the UK market for a number of reasons, much of which was focused around the cost and complexity of conversion. To qualify, properties could not be owner/occupied and retention of significant exposure to running a hotel business on the part of the owner was not allowed, making third party management agreements an issue, forcing the use of lease-based contracts.
It was possible to set up a separate Opco, although there would a stamp duty land tax liability in the lease arrangements as group relief would not be available and the requirement to have other shareholders in Opco would mean the setting up a further layer of complexity in the form of a joint venture. Add in the cost to conversion and the myriad of other, less convoluted structures in the hotel sector and the tax-savings were deemed not worth the hassle. Throw in the lack of large UK-based hotel groups which could use scale to take advantage of the REIT perks and it has meant a quiet period for those consultants who had swotted-up on the rules when the regime was first approved.
The UK government has now announced its intention to undertake an informal consultation with the real estate industry and representative bodies on proposed changes to the regime, which are aimed at reducing barriers to entry and investment in REITs, and reducing the regulatory burden for current and future REITs.
They include relaxing the close company condition in certain situations, abolishing the 2% conversion charge for companies entering the regime and relaxing the requirement for a REIT to be listed on a recognised stock exchange, which, in the case of the latter, could encourage entry into the REITs regime, particularly for start-up property investment companies.
There has not been a rush to embrace the news, given that the only firm proposal has been removing the conversion charge. To be included in the consultation is the introduction of a diverse ownership rule for institutional investors which would enable them to meet the non-close company rule and enable institutional investors to set up UK REITs.
The government is also allowing cash to be a "good" asset for the purpose of the REIT balance of business asset test, allowing REITs to make investment decisions on a commercial basis.
Deloitte real estate tax partner Phil Nicklin, said: "What we could see is two or three institutions joining together to form their own REIT. REITs must be diversely owned and this type of arrangement has historically been seen as having just one or two shareholders. But institutions such as life companies, life insurers and pension funds are diversely owned due to their shareholder structure."
The sector must now wait for the results of the consultation, to decide if it makes REITS not just more attractive, but attractive enough.
Also up for reform is Air Passenger Duty, with Chancellor George Osborne delaying next month's planned increase and announcing a review of the "arbitrary" banding system used to calculate the level of APD paid, to eliminate situations where a flight to the Caribbean attracts more APD than a longer flight to the US.
There have also been calls in the sector for the Chancellor to follow the example of the Germans in the phasing out of APD as the EU Emission Trading Scheme tax comes in, so that travellers and holidaymakers are not effectively taxed twice.
David Roche, president of Hotels.com, said: "If the government wants to persuade visitors, it could do more to alleviate the rise in fuel to the travel sector. It could freeze air tax when fuel costs rise. This would be a welcome boost."
Despite the move, the rate of taxation faced by those travelling from the UK remains high. Julie Southern, chief commercial officer for Virgin Atlantic, said: "Although this move by the Chancellor is a welcome first step, Britain still has the highest air taxation of all European and G20 countries, and annual APD receipts are forecast to increase by over £1bn in the next four years."
While this is good news for the staycation market, visitors to Britain are liable to pay the duty when they fly home, which may cause them to side-step the UK altogether. While Osborne is looking to draw in further investment to the property market, if he does not resolve APD issues, there may only be UK guests to stay in the hotels owned by the newly-created REITs. He is now turning to the sector to seek advice on how to combine cuts in tax with his required increase in tax-take.