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Finance Bill

My Lords, as a member of the Economic Affairs Committee and the Finance Bill sub-committee, I will take up the third of the three topics on which our report concentrates: the real estate investment trusts, or REITs, which the noble Lord, Lord Vallance, mentioned. The sub-committee took the opportunity to review their progress since the introduction of the REITs regime in January 2007. The REITs concept was introduced into the UK by the Finance Act 2006. Its aim was to improve the quantity and quality of finance for investment in property and remove tax distortions, in particular the hazards of double taxation, for property investment companies. Minor technical changes have been made to the REITs regime in every Finance Bill since 2006, and the measures in this Bill are modest but useful and welcome. In considering whether the arrangements have worked satisfactorily overall, the committee concludes that the regime was successfully launched, has been well handled and has operated well for large existing commercial property investments groups that have converted into REITs, of which there are now 21, with assets of some £30 billion. However, the Government made it clear when they introduced the REITs model that they hoped this would attract investment into the residential rented property world as well as into the commercial sector, thereby helping to meet the acute shortages of homes that are needed in this country, as identified by the review by Kate Barker at the Bank of England. On this score, we must conclude—and the committee did—that the REITs regime has failed us. No new REITs of any kind have been formed. In particular, no new REITs have been formed to invest in residential property. This failure of successive Finance Acts means that the opportunity to draw in large-scale institutional investment into the private rented sector has so far been lost. REITs are of considerable importance in the USA and, with the unwinding of the buy-to-let market in the UK, there has never been a time in which investment in the private rented sector has been more needed. We know from Kate Barker’s analysis that we need to build something like 240,000 new homes every year. Indeed, the independent National Housing and Planning Advice Unit has recently recalculated the figures and come up with a new figure of 257,000 homes that are required each year. Yet house builders building homes for sale are unlikely to do better than about 80,000 homes in the current year. That is far, far below the level that is needed. It seems likely, with house-building in the doldrums and the lack of available mortgage finance stretching into the future, that this low level of house-building for sale will be continued for some years to come. A healthy private rented sector could fill that gap and meet the needs of the growing numbers of people who cannot afford to buy and, for different reasons, do not want to take on mortgage commitments. At present, we rely on individual small-time investors: the buy-to-let investor. According to a recent report for the Government by Julie Rugg of York University, there are now something like 1.2 million private landlords, very many of whom have a single property in their ownership. This produces considerable disadvantages in the quality of management that one can expect, compared with that of an institutional landlord who can afford the professional skills of proper larger-scale management. It means that a lot of investors are looking to the short term, rather than in the long term in which institutions are more interested. It also means that these small-time investors are not in a position to commission the building of new apartment blocks, as can institutions that are looking for large-scale opportunities in which to invest. Without the REITs model working, we are missing out on the opportunity to bring in the huge sums of money that are so badly needed in housing and that are not likely to be found from simply building homes for sale, on which we have relied for the past 20 years or more. Moreover, the attractions to institutional investors of a residential investment model that works are considerable. Rents—noble Lords will recall that the Rent Acts were abolished more than 20 years ago—are likely to rise in line with earnings rather than with the RPI. That can match the requirements of institutional investors in property. Rents could rise that sensible margin ahead of the RPI in line with incomes each year; yet the institutions are steering clear of those investment opportunities because we do not have a real estate investment trust model that works for us. Market conditions have been blamed for any of the REITs failing to materialise for residential property investment. They were also blamed when property prices were rising rapidly and yields were falling correspondingly. Now, market conditions are again blamed for the absence of REITs when property prices are falling. This suggests that, as the committee concluded, it is the system itself that is not what it should be and not simply a matter of market failure. The committee concluded that the modest measures on REITs in the Finance Bill are useful and welcome, but, as it says, ""no-one has claimed that they will make any … difference either to the number of REITs or to the recovery of the property market"." Further changes, like the treatment of cash under the balance-of-business test and the payment of dividends other than in cash, are well worth further consideration, but the chief concern of the committee was the policy failure to see any residential REITs established. The committee’s report commented that, ""the official attitude appears to us to have bordered on the complacent and unduly cautious"." Will the Minister take forward the committee’s firm recommendation that advantage be taken of the excellent consultative machinery that now exists between the Treasury, the British Property Federation and the Royal Institution of Chartered Surveyors to review the workings of the REITs system and see whether the huge potential for investment in residential property cannot now be unleashed?