(To read more on the debt and equity markets, click here.)

CANNES-After months of drafts and revisions, the final wording of legislation that would make REITs a reality in the UK is due out next Wednesday during government’s annual budget statement. And while many parts of the proposed structure mirror the US REIT form, there are provisions not included in stateside structures that could seriously hobble UK REITs’ effectiveness.

As GlobeSt.com reported this morning, much like their US counterparts, UK REITs would get an exemption from corporate tax on rental income or capital gains as long as 95% of profits are directed to shareholders. Industry analysts suggest this could quadruple Britain’s quoted-property sector.

But what one expert very close to the process calls “a major fly in the ointment” is the issue of conversion charges. Non-existent in the US, conversion charges are the law of the land in France and will likely be when REITs come to Germany.

“So there is major precedent here,” said John Gellatly, head of indirect property investments and strategy for Merrill Lynch Investment Managers in London. Gellatly is one of six UK industry experts from a variety of disciplines who have been advising the government on the need for, and potential shape of, trusts in Great Britain.

On the whole, he told GlobeSt.com during Mipim, “government officials have been very open to well-reasoned arguments, and it’s been a very grown-up and collaborative process.” But the one area about which there has been no meaningful dialogue has been on the issue of conversion costs, except the government “has said they are going to do it.” In France, the effective conversion charge comes down to 16% of the capital gains spread over 14 years, Gellatly explained.

There are other issues, but on virtually all of these the government and the six-person advisory committee have enjoyed the open dialog Gellatly referenced. This has been particularly true since a draft was released in late 2005 and the committee returned various recommendations on issues including a 10% shareholders tax rule and gearing limits.

But the major remaining stumbling block is the conversion cost, and it could be huge. “We’ve said all along that if this structure is not attractive to the industry, for whatever reason, or specifically if the conversion charge is too onerous, people will simply not convert,” Gellatly said. “Up until three years ago the UK listed property sector was shrinking dramatically, and everything was being taken private. If REITs don’t work for whatever reason, the rush of capital secured in UK real estate and held by offshore vehicles will dramatically accelerate. The government will lose all the tax and all the onshore multiplier effects. It will all shift offshore, and this will be a major potential loss for the UK.”

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