KPMG Corporate Finance are delighted to act as sponsor to Glenstone Property Plc which listed on the CISX on 28 October 2008. The company has its beginnings over 30 years ago essentially as a family-owned company and it is relatively small compared to those large property companies listed on the LSE. Its aim, with the advice of KPMG Tax Advisors in the UK, is to become a REIT and it will become the first REIT to be listed on the CISX.
The REIT regime, introduced in the Finance Act 2006, is intended to encourage greater investment in the UK property market.
Currently, investing in property through a UK tax-resident company that is not a REIT has the disadvantage that some categories of shareholder effectively suffer tax twice on the same income. They suffer tax, indirectly, when the company pays UK corporation tax on its profits, and directly (but with the benefit of a tax credit) when the shareholder receives a dividend. Non-tax paying entities, such as UK pension funds, suffer tax indirectly when investing through a company that is not a REIT in a manner they do not suffer if they were to invest directly in the property assets.
A UK resident company which is a REIT does not pay UK corporation tax on its income and capital gains from its qualifying property rental business (the ”Tax-Exempt Business”) provided that certain conditions are satisfied. Instead, distributions in respect of the Tax-Exempt Business will be treated for UK tax purposes as UK property income in the hands of shareholders.
There are a number of conditions to be satisfied to qualify as a REIT and there are two that specifically concern the CISX:
- The ordinary shares of the company (or principal company in a group) must be listed on a Recognised Stock Exchange. HM Revenue and Customs maintains a list of recognised stock exchanges which includes the Channel Islands Stock Exchange.
- The company must not be a ”close company”. This condition is automatically satisfied if not less than 35 per cent of the company’s/principal company’s ordinary shares are listed on a recognised stock exchange and beneficially held by the public. Such shares must have been the subject of dealings on the stock exchange within the preceding 12 months.
Because of this beneficial tax treatment there is considerable attraction in becoming a REIT, not only for the large property owning funds, but for the smaller companies that have perhaps been in existence for a number of years and are looking to add value for their existing shareholders. Such companies may have their origins in family-owned businesses whose investor base has broadened over the generations as shares have been passed down to offspring.
One of the real advantages of using the CISX as a recognised stock exchange for REIT purposes, is the simplified regime of its procedures, its relatively low cost to list and its profile. From a smaller company’s point of view, the directors may not wish to incur the relatively large cost or be part of the high profile that comes with being listed on the LSE. For the directors it is more important that the listing achieves the goal of becoming a REIT in a relatively inexpensive manner and it is this feature which may encourage a lot of the smaller property companies to look to the CISX
However, quite rightly, challenges remain. The directors are still directors of a listed company and as such it must follow the standards expected of a listed company. The company must ensure it has sufficient calibre of directors to satisfy the exchange and the directors must adhere to the rules of the exchange when it comes to share dealings and asset transactions. The executive directors may be used to running the company as a private investment vehicle. However, once listed, they must adhere to the business objectives set out in the listing document and it is this mindset which must be changed if the company is to make a success of its listing.
A listed company must have a good corporate governance mindset but this must be practical in terms of the business being conducted – again the directors may not be familiar with concepts such as “audit committees” but they must embrace them to show the CISX and potential investors they are worthy of being listed and potential investment.
It is important that the sponsor takes the time and ensures that the directors are fully aware of their responsibilities, not only at the listing stage, but also their on going obligations. Again this is where the CISX has proven to be more advantageous – by being flexible and willing to engage directly with the directors of the company, it can perhaps provide a pragmatic solution to a particular difficulty.
Legal and financial due diligence is key for the sponsor to gain an understanding of the business and to ensure the company is appropriate for a listing. Again smaller companies may not be entirely comfortable with the amount of work this involves but, not only is it necessary for the sponsor to meet its obligations, it will be invaluable for the non-executive directors as they will gain a greater understanding of the risks associated with the business and it shows they have taken reasonable measures to ensure that the information in the listing document is complete.
The CISX fulfils the basic requirement for a REIT that it must be listed on a Recognised Stock Exchange but its Rules and their pragmatic, but vigorous, interpretation results in the CISX satisfying a lot more of the boxes that smaller property companies are looking to tick when they are considering.
By Rob Hutchinson, Director, KPMG Corporate Finance (C.I.) Limited
This article originally appeared in the Spring 2009 edition of the Channel Islands Stock Exchange Bulletin Board.
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