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Finance (No. 2) Bill

I rise to speak to our amendment No. 130, which seeks to allow real estate investment trusts—REITs—to list on the alternative investment market of the London stock exchange or its equivalent European Union markets. In debating this issue, we return to part 4 of the Bill, which deals with the regime to introduce REITs. I have said on several occasions that we welcome in principle the introduction of such a regime in the United Kingdom; indeed, this is an initiative that we have been advocating for quite some time. That being the case, we have sought to work constructively with the Government to ensure that the regime is in good order when it commences its operation as scheduled in January 2007. I hope that it is fair to say that we maintained that approach in Committee, where we pressed the Government on a variety of issues, including the qualifying conditions for REIT status and the penalties for breaking those conditions, and the definitions to be used in operating the regime. The Minister might also recall that we were of some assistance, at the end of a lengthy afternoon sitting, in deleting clause 143 from the Bill. I see from his reaction that he remembers that. However, there are still some weaknesses in the proposed REITs regime that I should like to address, both in relation to our amendment No. 130 and to amendments Nos. 60 and 61, which have been tabled by my right hon. Friend the Member for North-West Hampshire (Sir George Young). I shall begin, however, by referring to Government amendments Nos. 27, 28, 29 and 30. Government amendment No. 27 relates specifically to clause 107 of the Bill, which deals with the conditions necessary for a business to qualify as tax exempt under the REITs regime. Condition 3 of clause 107 is that owner-occupied properties should be excluded from tax-exempt status. In Committee, we discussed the operation of condition 3 in some detail—particularly in relation to car parks, as I recall. A related issue had arisen during the consultation process that preceded our Committee deliberations, which was the definition of ““owner-occupied”” as generally understood under international accounting standard 40—known as IAS 40 for short. That problem threatened to create unintended consequences for the REITs regime. The problem would be that if, in certain circumstances, an REIT company were to provide significant services to the occupier of one of its properties, the company might itself be deemed to be an owner occupier under the strictures of IAS 40, and therefore fall outside the REITs regime under condition 3 of clause 107. Government amendment No. 27 seeks to address that by ensuring that in such circumstances, where the tenant has exclusive occupation of the property, the accounting definition of ““owner occupied”” is effectively overridden, so that the REIT company is not deemed to have breached condition 3 of clause 107. The associated Government amendment No. 30 appears to be essentially a drafting amendment, which ensures that the revised application of clause 107 is extended to group companies via a corresponding change to the associated schedule 17. So far, so good. The British Property Federation welcomed the amendment with the following comment, which is germane:"““We welcome this amendment, which addresses a concern raised by industry during the consultation. However, we are aware that there may be a number of different situations where the definition of owner occupied property inadvertently causes a property to be excluded from the tax exempt business. Government should be aware of this and have a strategy in place to listen to industry concerns and react quickly to those situations through producing appropriate guidance.””" That seems a not unreasonable request, given that this is an especially complex area. I hope that the Minister and his officials can liaise with the industry to try to address, as far as practically possible, any remaining anomalies in the subsequent guidance, in light of ever-changing commercial circumstances. At some point, the guidance might have to be updated to take account of changing market conditions. Perhaps the Economic Secretary will address that question when he sums up. Government amendments Nos. 28 and 29 relate to schedule 16 of the Bill. Schedule 16 defines various categories of business and income which are specifically excluded from the REITs regime. Those amendments relate to questions raised about the operation of the schedule in Committee and when we debated the related clause 111—the issue of potential double taxation of properties held on so-called trading account, and yet another issue relating to the definition of owner occupation, to reiterate the point about the complexity surrounding that term. In essence, those measures were originally proposed in the associated draft regulations, on which I spoke for the Opposition. In Committee, the Economic Secretary intimated that he would be likely to bring forward amendments on those subjects on Report, and therefore to include such elements in the Bill, which in principle we welcome. He has kept his word and we commend him for that. We still hesitate about the solution, however, in this instance of what one might call clarification by exclusion. Even though the Government’s solution will now appear in the Bill, they still seek to achieve that clarification by extending the inclusion to encompass all so-called trading properties, which underlines how little this part of the Bill does for residential property, as that is a particular challenge for residential property companies. I shall refer to that topic again shortly, although I suspect that my right hon. Friend the Member for North-West Hampshire will also be keen to catch your eye on that, Mr. Deputy Speaker, when he speaks to his amendments. Our amendment No. 130 is designed to extend the qualifying conditions for a company applying for REIT status under clause 106, specifically by allowing REIT companies to list on the alternative investment market of the London stock exchange—AIM, as it is now more popularly known. When the matter was touched on in Committee of the whole House, Ministers pointed out that, under EU law, that would also entail reciprocal listing on other comparable EU exchanges. Our amendment specifically caters for that, so I hope that it will be more acceptable as a result. There are several good reasons why REITs should be able to list on AIM. First, property companies registered as REITs are likely to enjoy significant tax advantages over those usually smaller companies denied that status. It therefore seems probable that there could be considerable consolidation in the property market, as AIM-listed companies that cannot qualify for tax-exempt status are gradually taken over by companies on the full listed market that do enjoy those tax advantages. That is potentially unfair, and could cause the United Kingdom property market to be increasingly dominated by a relatively small number of very large REIT companies. That is presumably not what the Government intended when they introduced the regime. Secondly, AIM-listed companies themselves might come under pressure to convert to a full stock exchange listing before they are really ready for it, principally in order to be able to qualify for REIT status, thus potentially causing a distortion in the orderly evolution of the market sector. Why not expand the condition at least to cover AIM-listed companies that meet all the other conditions in the Bill? There are a number of them and we have already debated them at length, so I hope I need not repeat them now. That would facilitate greater diversity in the REITs market available to investors. I think the third point quite important. I am sure that, given his business experience in the United States, my hon. Friend the Member for Braintree (Mr. Newmark) will want to expand on it. US experience suggests that widening the listing base is a good way of helping the concept to take off. The Financial Times estimates that more than $300 billion is now invested in US REITs, and notes that spreading the listing base was important to the generation of that significant investment. Our Government would presumably like to emulate that as well, at least on a comparable United Kingdom scale. We know that it worked well in the United States. Why should we not learn from that example? As the Americans have one of the oldest established REITs regimes in the world—I believe that it began in 1960—they have considerable experience in operating REITs, and they found widening the listing base to be a good way of helping the concept to grow. Why do we not learn from our American cousins in this instance?