I do not intend to detain the Committee too much longer.
A consideration of whether to use a real estate investment trust to raise investment for social housing has been made more necessary by the position in which a lot of housing associations and other providers find themselves. In 2011-12, only 15,700 affordable homes were started in England. If the Government’s intention—or hope—to create 170,000 affordable homes by 2015 is to be achieved, something will have to be done, because some 42,500 homes need to be built in each of the four years from 2011-12 to 2015. The first year of that period has not delivered the required number, so there is a lot of ground to make up, and that is why housing associations and others are looking for other means of bringing investment into the sector to achieve these ends. It is worth considering using this mechanism to bring investment into the sector.
Getting investment into social housing is critical. The hon. Lady will know that the number of social housing units fell during the past decade or so, so more social housing units are needed to make up for that. The problem is that social housing rents are sub-market and REITs, as equity, have a return rate required by investors of about 10%, compared with a rate of 5% or 6% attached to other forms of debt or quasi-debt. Is it not a challenge to square the funding circle for sub-market rents for social housing on the one hand with the high return rate demanded by equity investors on the other?
I suspect that it may be a challenge. Although these changes may make it possible for charities and registered social landlords to choose to become part of a REIT, that might be extremely difficult in practice. The concept of affordable rent is at risk, not just because of this form of investment, but because of the general decline in grant assistance. The cost of building a new home has to be covered from somewhere and, unless costs are driven down substantially, lower grants mean that finance has to be raised another way.
In respect of the more traditional route of raising finance through bank loans, which I have already described as difficult, there is a feeling in the sector that if it is to create the same number of houses on a smaller grant—wherever the additional investment is coming from—there is a question about what the appropriate rent would be to finance such borrowing. If rents are to be raised, a question arises about the degree to which the homes that are built may still be called affordable homes. That might lead to a problem with the Government’s welfare reform programme and the desire to drive down the cost of housing benefit, so a lot of things must be considered.
It would be wrong for the sector not at least to have opportunities to find out whether such a process is feasible. A REIT may work best for the private rented sector rather than the public rented sector.
I agree that that makes enormous sense for the private rented sector. My worry is that if the return rate is too high, there will then be pressure for higher rents, and that as the overwhelming majority of social rents are paid for by the taxpayer through housing benefit, we will—following the money—put more strain on the public finances. That is why we should be very cautious about introducing equity-style returns into the social housing sector, because it will be paid for by the taxpayer at a time when the public finances are under considerable pressure.
I very much share those concerns. We have to find ways of resolving these tensions. Indeed, the problem then becomes wider, because if we do not create more affordable homes that have low rents and rely increasingly on what has been traditionally the affordable sector producing housing at higher rents, or if we continue to rely as heavily as we have in recent years on the private rented sector to provide a place for people who can afford it only through housing benefit, we will create further pressures on the housing benefit budget and also considerable pressures on individuals. I think that we all share the belief that it is not right for people to be trapped into what always used to be described as the poverty trap; they are trapped in a situation in which they literally cannot afford to work because the rent on their home is so high.
We have not seen that happening so far in the affordable sector, but I think that we have seen it in the private rented sector. There is almost a kind of Hobson’s choice if we are not prepared to subsidise fully affordable housing. However, I am moving further from the subject before us, so I simply say that there is a role for REITs in the residential sector. It may well be that they will be more appropriate for private rented provision, and they might indeed improve the quantity, quality and management of the private rented sector, which would be to everyone’s benefit.
I am delighted to hear the Committee so chirpy on our first day back after Her Majesty’s diamond jubilee.
If I may, I will go through what the clause does and the schedule it introduces, and I will also answer some of the questions that have been put. I welcome the interest that has been shown on both sides of the Committee in real estate investment trusts.
Clause 21 introduces schedule 4, which makes improvements to the REIT regime. It does so by reducing barriers to entry to the regime and by easing administrative burdens. Turning briefly to the wider context, these changes, alongside much wider planning reforms, will help to support the expansion of the property sector, encourage further investment and stimulate the construction industry. I suspect that we all welcome those aims, and I know that we all welcome the focus on increasing the amount of affordable housing, as has been shown in this debate.
To put the measures in context, hon. Members will be aware that Budget 2012 announced a consultation on the potential role of REITs to support the social housing sector and on the technical changes that would be required to enable REITs to invest in REITs. I add that the REIT regime is always kept under review to ensure that it is fit for purpose—it is, after all, something that has evolved since its introduction in 2007—and I know that that was the focus of the comments from the hon. Member for Kilmarnock and Loudoun.
For the benefit of those hon. Members who are not quite so clued up as the hon. Lady, I shall say a little more about what REITs do. REITs are tax-exempt vehicles that were introduced to encourage investment in the property sector. The response to the consultation on investment in the UK private rented sector in September 2010 set out that we would explore ways to improve the REITs regime, with a view to facilitating in the longer term the establishment of residential REITs. Further to consultation with interested parties, we announced at Budget 2011 that the barriers to entry for new REITs would be reduced to support the industry in general. During that informal consultation, we received 53 written responses from a wide range of interested parties including REITs, house builders, fund managers and property investment companies. Without exception, they saw the measures as a positive step. Draft legislation was published last December, and changes have been made in response to the comments that we received.
Schedule 4 relaxes a number of requirements on REITs to remove barriers to entering the regime, including the requirement that a REIT be listed on a recognised stock exchange. That will be relaxed so that REITs can be listed on trading platforms such as the alternative investment market and foreign equivalents.
There are two relaxations of the REIT non-close company requirement, which requires that a REIT be diversely owned. The first is that new REITs will be given three years from joining the regime to meet the non-close company requirement. The second is that certain institutional investors will not make a REIT a close company for the purposes of the REIT regime.
The schedule lists the type of institutional investors that will not make the REIT a close company. There is a power to make regulations to add, modify or remove categories of investors to or from the list. The hon. Member for Kilmarnock and Loudoun asked about that, and I can confirm that the Government looked at financial institutions that would be able to invest in a REIT and that would be attracted to the tax treatment offered by the regime. We wanted institutional investors to be investing on behalf of others and to have a degree of regulation. The hon. Lady will know that the Bill allows us to make changes as we go on.
I will dwell briefly on a couple of the hon. Lady’s questions to ensure that I answer them. She asked about accounting periods, and I will try to make the position clear. There are various dates involved, and there is a good reason why: in simple terms, some measures affect new REITs, while some affect existing REITs. Some of the changes that affect new REITs will take effect from Royal Assent which, as she rightly identified, we hope will be later this summer. Some apply to existing REITs, so they need to apply to the relevant accounting period. That explains the difference in the timings that she identified in the schedule and the explanatory notes. For absolute clarity, I refer her to the HMRC information note, which makes the operative date clear. I shall read it out for the record:
“The measure as it relates to the barriers to entry to the regime will have effect for companies that join the regime on or after the date of Royal Assent…For the balance of the measures they will have effect for REITs in the regime on or after the date of Royal Assent to Finance Bill 2012.”
The hon. Lady also raised a broader point about the features of the property market, one of which can be—particularly in the private rented sector—relatively high turnover. Those issues may have been well considered in the consultations that I have referred to, but she makes a fair point. There are shorter and longer products on the market, which are convenient for different people. Short tenancies are one such product, and there are other types of tenancies that suit others. The changes made by schedule 4 will make REITs more able to take decisions that make commercial sense, and they can define for themselves what commercial sense means in the context of a market that in some cases has high turnover.
I took a detour from my explanation of what the schedule does to deal with the point about institutional investors, but I return to that explanation by saying that the balance of business test will be relaxed to require that property rental business assets and cash are 75% of a REIT’s assets for the purpose of the test. The requirement to pay a conversion charge of 2% of the value of a REIT’s property assets on joining the regime will be abolished, which is a particularly clear removal of a barrier to entry.
The profit-finance cost ratio, which is also used to ensure that REITs do not over-borrow, will be simplified so that financing costs will consist only of interest and interest equivalents. The amount of tax paid when financing costs exceed the limit will be restricted to a proportion of the property profits. Finally, the legislation makes it clear that that treatment of assets that are disposed of will not apply where the disposal is to a company that is part of the same REIT group.
In summary, the changes introduced by clause 21 and schedule 4 address barriers to entry to the REIT regime and reduce administrative burdens on existing REITs. We hope that that will encourage greater investment in the property rental sector and will stimulate the housing market.