ABOUT REITS
The Government established the REIT status in the UK in 2007 to remove tax inequalities between different real estate investors and with the aim of improving overall investor access to real estate. Real Estate Investment Trusts (REIT) are companies which are exempt from corporate taxation on profits from property rental income and capital gains on the sale of investment properties.
REITs must distribute 90% of UK rental income in the form of property income dividends (PIDs). The consequence of this is to make the tax implications of investing in REITs similar to that of investing directly in property. REITs are also required to meet certain conditions including the proportion of total profits and assets accounted for by their property rental businesses. They remain liable to corporation tax on nonproperty investment businesses e.g. management fees and interest receivable.
The UK has had a tax exempt real estate regime since 1 January 2007. A number of other countries, notably the US, Australia and France also have tax exempt REIT regimes. British Land has been a REIT since 1 January 2007.
The government is looking to encourage the growth of the REIT sector. The 2011 budget proposals are looking to relax qualifying conditions to encourage new entrants, including the abolition of the entry charge.
Property Income Distributions (PIDs)
Profits distributed as PIDs are subject to tax in the hands of the shareholders as property income. PIDs are normally paid net of withholding tax currently at 20% which the REIT pays to the tax authorities on behalf of the shareholder. Certain types of shareholder (i.e. pension funds) are tax exempt and receive PIDs without withholding tax.
Property companies also pay out normal dividends, called non-PIDs, which are treated as normal dividends and not subject to withholding tax.
RENTS
Headline rent is the contracted gross rent receivable which becomes payable after all the tenant incentives in the letting have expired.
Net effective rent is the contracted gross rent receivable taking into account any rent free period or other tenant incentive. The incentives are treated as a cost to rent and spread over the lease to the earliest termination date.
Rack rented is the term used to describe when the contracted rent is in line with the estimated rental value (ERV), implying a nil reversion.
Under rented is the term used to describe when the contracted rent is below the estimated rental value (ERV), implying a positive reversion (see below). Over rented is the inverse of this.
Reversion is the increase in rent estimated by the external valuers, where the passing rent is below the estimated rental value. The increases to rent arise on rent reviews and lettings.
LEASES AND LETTINGS
Lettings and Lease Renewals are divided between short-term (less than two years lease length) and long-term (over two years lease length). Lettings and renewals are compared both to the previous passing rent as at the start of the financial year; and the ERV immediately prior to letting. Both comparisons are made on a net effective basis.
Rent reviews are compared to the previous passing rent.
Tenant (or lease) incentives are any incentives offered to occupiers to enter into a lease. Typically the incentive will be an initial rent-free period, or a cash contribution to fit-out. Under accounting rules the value of lease incentives given to tenants is amortised through the income statement on a straight-line basis to the earliest lease termination date.
Turnover rents is where all or a portion of the rent is linked to the sales or turnover of the occupier.
Rents with fixed and minimum uplifts are either where rents are subject to contracted uplifts at a level agreed at the time of letting; or where the rent is subject to an agreed minimum level of uplift at the specified rent review.
Capped rents are subject to a maximum level of uplift at the specified rent reviews as agreed at the time of letting.
Collar rents are subject to a minimum level of uplift at the specified rent reviews as agreed at the time of letting.
RENTAL INCOME
Gross rental income is the gross accounting rent receivable (quoted either for the period or on an annualised basis) prepared under IFRS which requires that rental income from fixed/minimum guaranteed rent reviews and tenant incentives is spread on a straight line basis over the entire lease to first break. This can result in income being recognised ahead of cash flow.
Net rental income is the rental income receivable in the period after payment of direct property outgoings which typically comprise ground rents payable under head leases, void costs, net service charge expenses, and other direct irrecoverable property expenses. Net rental income is quoted on an accounting basis. Net rental income will differ from annualised net cash rents and passing rent due to the effects of income from rent reviews, net property outgoings and accounting adjustments for fixed and minimum contracted rent reviews and lease incentives.
Annualised rent is the gross rent receivable on a cash basis as at the reporting date. Additionally where rent reviews are outstanding, any increases to applicable estimated rental value (as determined by the Group's external valuers), less any ground rents payable under head leases.
Estimated rental value (ERV) is the external valuers' opinion as to the open market rent which, on the date of valuation, could reasonably be expected to be obtained on a new letting or rent review of a property.
Like-for-like ERV growth is the change in ERV over a period on the standing investment properties expressed as a percentage of the ERV at the start of the period. Like for like ERV growth is calculated monthly and compounded to the period subject to measurement.
Like-for-like rental income growth is the growth in gross rental income on properties owned throughout the current and previous periods under review. This growth rate includes revenue recognition and lease accounting adjustments but excludes properties held for development in either period, properties with guaranteed rent reviews, asset management determinations and surrender premiums.
Passing rent is the gross rent, less any ground rent payable under head leases.
PROPERTY YIELDS
EPRA Net Initial yield is the annualised rents generated by the portfolio, after the deduction of an estimate of annual recurring irrecoverable property outgoings, expressed as a percentage of the portfolio valuation (after notional puchaser's costs), excluding development properties.
EPRA Topped-Up Net Initial Yield is the annualised rents generated by the portfolio, after the deduction of an estimate of annual recurring irrecoverable property outgoings, plus rent contracted from expiry of rent free periods and uplifts agreed at the balance sheet date which are not intended to compensate for future inflation, expressed as a percentage of the portfolio valuation (after notional purchaser's costs), excluding development properties.
Overall Topped-up Net Initial Yield is the EPRA Topped-Up Net Initial Yield adding guaranteed fixed uplifts to the annualised rents.
Net Equivalent yield is the weighted average income return (after deducting notional purchaser's costs) a property will produce based upon the timing of the income received. In accordance with usual practice, the equivalent yields (as determined by the external valuers) assume rent is received annually in arrears. The British Land definition excludes Europe, where leases are linked to annual indexation.
Net Reversionary yield is the anticipated yield, which the initial yield will rise to once the rent reaches the estimated rental value.
Yield shift is a movement (usually expressed in basis points) in the yield of a property asset, or like for like portfolio, over a given period. Yield compression is a commonly used term for a reduction in yields.
LEASE LENGTH AND OCCUPANCY
Occupancy rate is the estimated rental value of let units expressed as a percentage of the total estimated rental value of the portfolio, excluding development properties. It includes accommodation under offer or subject to asset management (where they have been taken back for refurbishment and are not available to let as at the balance sheet date).
Total occupancy rate is the occupancy rate excluding accommodation under offer or subject to asset management.
Weighted average lease term is the average lease term remaining to first break, or expiry, across the portfolio weighted by contracted rental income (including rent frees). The calculation excludes short-term lettings, residential leases and properties allocated as developments.
Virtual freehold represents a long leasehold tenure for a period up to 999 years. A 'peppercorn', or nominal, rental is paid annually.
PLANNING
The 1947 Town and Country Planning Act requires all proposals, with a few exclusions, to secure planning permission from the local authority. The requirement to obtain planning permission extends not only to new construction, but also to substantive changes of use of a property. There are various 'use classes'. Change of use to a different use class generally requires Planning consent.
Planning consent gives consent for a development, and covers matters such as use and design. Full details of the development scheme must be provided in an application for full planning consent, including detailed design, external appearance and landscaping before a project can proceed. Outline planning consent establishes the broad outline of the scheme and is subject to the later approval of the details of the design.
Retail planning consents are separated between A1, A2 and A3 – as set out in The Town and Country Planning (Use Classes) Order 2005. Within the A1 consent category, an Open A1 consent grants planning for any type of retail, while Restricted A1 consent places limits on the types of retail that can operate from the site (this is typically a restriction that only bulky goods operators are allowed to trade at that site).
| Class | Description | Use for all/any of the following purposes |
|---|---|---|
A1 |
Shops |
Retail sale of goods other than hot food; post office; sale of tickets or as a travel agency; sale of sandwiches or other cold food off the premises; hairdressing; direction of funerals; display of goods for sale; hiring out of domestic or personal goods/articles; the reception of goods to be washed, cleaned or repaired; a retail warehouse club being a retail club where goods are sold, or displayed for sale, only to persons who are members of that club; or as a night club |
A2 |
Financial and professional services |
Financial services; professional services professional services (other than health or medical); or other services (including betting) appropriate for a shopping area |
A3 |
Restaurants and cafés |
Sale of food/drink (i.e. restaurants) |
A4 |
Drinking establishments |
Pub, wine bar or other drinking establishment |
A5 |
Hot food takeaways |
Sale of hot food for consumption off premises |
PROPERTY VALUATION
Property valuation In accordance with usual practice, the Group's exsternal valuers report valuations net, after the deduction of the prospective purchaser's costs, including stamp duty land tax, agent and legal fees.
Market value in relation to property assets is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion (as determined by the Group's external valuers). In accordance with usual practice, the Group's external valuers report valuations net, after the deduction of the prospective purchaser's costs, including stamp duty land tax, agent and legal fees.
Portfolio valuation uplift is the increase in value of the portfolio (after taking account of capital expenditure and capitalised interest) of properties held at the balance sheet date and sales during the period.
Capital return is calculated as the change in capital value of the UK portfolio, less any capital expenditure incurred, expressed as a percentage of capital employed over the period, as calculated by IPD. Capital returns are calculated monthly and indexed to provide a return over the relevant period.
DEVELOPMENT
Development construction cost is the total cost of construction of a project to completion, excluding site values and finance costs.
Net Development Value is the estimated end value of a development project as determined by the external valuers for when the building is completed and fully let (taking into account tenant incentives). It is based on the valuers view on ERVs, yields, letting voids and rent frees.
The residual site value of a development is calculated as the net development value, less a developer's profit margin, development construction costs to complete, finance costs (assumed at a notional rate) of a project to fully let and notional site acquisition costs. The residual is then determined to be the current site value.
Developer's profit is the profit on cost assumed by the valuers to be required to start a project. The developers profit is typically calculated by the valuers to be a percentage of the estimated total development costs.
EPRA DEFINITIONS
EPRA is the European Public Real Estate Association, the industry body for European REITs.
EPRA earnings is the profit after taxation excluding investment property revaluations and gains/losses on disposals, intangible asset movements and their related taxation.
EPRA net assets (EPRA NAV) are the balance sheet net assets excluding the mark-to-market on effective cash flow hedges and related debt adjustments, deferred taxation on revaluations and diluting for the effect of those shares potentially issuable under employee share schemes.
EPRA NAV per share is EPRA NAV divided by the diluted number of shares at the period end.
EPRA NNNAV is the EPRA NAV adjusted to reflect the fair value of debt and derivatives and to include deferred taxation on revaluations.
EPRA vacancy rate is the estimated market rent of value (ERV) of vacant space divided by ERV of the whole portfolio, excluding developments. This is the inverse of the total occupancy rate.
FINANCIAL
Underlying profit before tax (Underlying PBT) is the pre-tax EPRA earnings measure with additional company adjustments, including realisation of cash flow hedges and non-recurring items.
Underlying earnings per share (EPS) consists of underlying profit after tax divided by the diluted weighted average number of shares in issue during the period.
Loan to Value (LTV) is the ratio of the principal value of gross debt less cash, short-term deposits and liquid investments to the aggregate value of properties and investments.
IFRS are the International Financial Reporting Standards as adopted by the European Union. IFRS profits before tax (IFRS PBT) are as defined by the International Financial Reporting Standards.
Interest cover is the number of times net interest payable is covered by underlying profit before net interest payable and taxation.
Mark-to-market is the difference between the book value of an asset or liability and its market value.
REIT total return (Total accounting return) is the growth in EPRA NAV plus dividends paid, and this can be expressed as a percentage of EPRA NAV per share at the beginning of the period.
REIT income return is underlying profit before tax (as defined above) after deduction of attributable underlying tax.
REIT capital return is REIT total return less REIT income return (as defined above).
Net operating costs are property operating expenses and administrative expenses net of fees and other income.
Weighted average debt maturity each tranche of Group debt is multiplied by the remaining period to its maturity and the result is divided by total Group debt in issue at the period end.
Weighted average interest rate is the Group loan interest and derivative costs per annum at the period end, divided by total Group debt in issue at the period end.
Total shareholder return is the growth in value of a shareholding over a specified period, assuming that dividends are reinvested to purchase additional units of stock.
OTHER
CACI Ltd is a wholly owned subsidiary of Consolidated Analysis Center Incorporated (CACI) providing marketing solutions and informational systems to local and central government and to business from most industry sectors (including retail).
Group is The British Land Company PLC and its subsidiaries and excludes its share of joint ventures and funds on a line-by-line basis (i.e. not proportionally consolidated).
IPD is Investment Property Databank Ltd which produces an independent benchmark of property returns.
