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“A successful REIT market should have both listed and unlisted vehicles in order both to allow maximum choice to investors of differing experience and size and also to provide a pooling facility for smaller REITs to develop outside a listed market until such time as they are ready and able to go public—this should be particularly helpful to smaller players in the market.”
Mr. Colin Breed (South-East Cornwall) (LD): Does the hon. Gentleman think that having smaller REITs might enable more local and regionalised funds to be brought into play? Many people feel that they would like to help particular geographical areas, rather than necessarily contributing to the national pot. The smaller ones, operating on a regional and local basis, can be very attractive.
Mr. Newmark: The hon. Gentleman makes an excellent point. We discussed in earlier debates how to stimulate housing, but not just in the south-east where there are enormous stresses and strains. My hon. Friend the Member for East Surrey (Mr. Ainsworth) alludes on his website to the fact that there is already far too much house building in the south-east. If we want to stimulate such building out in the regions— I see that I have finally got the attention of the Economic Secretary—I suggest that we follow Schumpeter’s principle that small is beautiful. If we want to encourage regional housing developments that tend to be smaller, the particular residential housing required is more likely to be of the right size to be on AIM, but not to have the wherewithal, facility or finances to list on a fully listed stock exchange.
The then Economic Secretary repeated a commitment in Committee of the whole House:
“We are willing to consider any consequence of market developments...We must always be willing to consider whether we want to change the regime in the interests of the market and clearly not to the disadvantage of the Exchequer.”—[ Official Report, 3 May 2006; Vol. 445, c. 1041.]
I would be interested to know whether the current Economic Secretary is still willing to be open minded about the matter. Perhaps he would like to intervene? I guess not. As AIM listing will have no adverse impact on the Exchequer—I recognise that the Economic Secretary and the Chancellor are concerned about that—will the Economic Secretary give a commitment at least to review the listing requirement in response to the lack of expected take-up from the residential property sector? That is all we ask. We want the Economic Secretary to be open minded and watch how the market develops. If the Government are not achieving their aims of stimulating the residential, not simply the commercial side, for REITs, we ask them at least to take an open-minded approach.
It is worth considering the comments of my hon. Friend the Member for Rayleigh (Mr. Francois) in Committee, when he gave a good analysis of the benefits of AIM. I must quote his thorough analysis in full. He stated:
“AIM-listed companies already provide a legitimate form of collective investment, so why have the Government decided to exclude them from the REIT regime from the start?”
The Economic Secretary never answered that. My hon. Friend continued:
“On a practical level, property companies that are registered as REITs are likely to enjoy significant tax advantages over those—usually smaller—companies that are denied the advantages that REIT status confers. There could therefore be considerable consolidation in the market as REITs take over other property companies such as those on AIM”—
my hon. Friend made that point again earlier today—
“which cannot qualify for REIT status. That is potentially unfair”.
I know that the Economic Secretary views fairness as an important criterion when considering such matters.
My hon. Friend continued by saying that, over time, that inability to qualify
“could mean that the UK property market was increasingly dominated by a relatively small number of large REIT companies. I presume that the Government did not intend that. We would move in the direction of an oligopolistic market and I am not sure that Ministers want that.
Moreover, AIM-listed companies might come under pressure to convert to a full stock exchange listing before they were ready for it, principally to qualify for REIT status, thus potentially causing a distortion in the orderly evolution of the market sector. Why not, therefore, expand the condition to cover at least AIM-listed companies”?
My hon. Friend makes that point time and again. He was dogged—indeed, almost terrier-like—about it. He continued by saying that expanding the condition would
“thus facilitate greater diversity in the REITs market available to investors... There is a strong common-sense argument for doing that.”—[ Official Report, 3 May 2006; Vol. 445, c.1026.]
Madam Deputy Speaker: Order. The hon. Member should finish with the quotation.
Mr. Newmark: Your timing was perfect, Madam Deputy Speaker, because I had just finished the quote.
The Government appear to be worried about the regulatory position, but AIM is not unregulated and it does not lack the transparency that the Government seek, for once, to encourage.
Madam Deputy Speaker: Order. I believe that I said that that was sufficient of the quotation, or has the hon. Gentleman completed it?
Mr. Newmark: To clarify, Madam Deputy Speaker, I was previously talking about my hon. Friend’s analysis of AIM and I am now moving on to the regulatory regime.
AIM does not stipulate minimum criteria for company size, track record or the number of shares required to be in public hands. The Government gave a parliamentary answer in response to queries about AIM’s regulatory position. In November 2003, the right hon. Member for Coatbridge, Chryston and Bellshill (Mr. Clarke) tabled a written question:
“To ask the Chancellor of the Exchequer...what discussions he has had with the (a) London Stock Exchange and (b) Financial Services Authority on the alternative investment market becoming an unregulated market...what research he has carried out on the way in which an unregulated alternative investment market would affect companies and investors”—
“and what discussions he has had with the European Commission about the alternative investment market becoming an unregulated market.”
The right hon. Member for Bolton, West (Ruth Kelly), responded:
“The London Stock Exchange...is a Recognised Investment Exchange...under the Financial Services and Markets Act...and”—
“has to operate all its markets, including the Alternative Investment Market (AIM), in compliance with the recognition requirements for REITs. The Financial Services Authority...supervises its compliance with these obligations...Because AIM is not going to become an unregulated market, the Treasury has not done any research about the impact of such a scenario on investors and issuers, nor have we discussed it with the European Commission.”—[ Official Report, 4 November 2003; Vol. 412, c. 624-25W.]
Let us come to the important issue, which is the housing requirements that the Chancellor, the Economic Secretary and, I assume, the Paymaster General are seeking. The Chancellor, as we have heard, said in this year’s Budget speech:
“To attract more capital into house building, we are now legislating to introduce for Britain the real estate investment trusts that are so successful in the USA.”—[ Official Report, 22 March 2006; Vol. 444, c. 293.]
So, we hear two things now. We hear that the Chancellor is looking to the US as an excellent example of successful REITs, and he is looking at REITs as a way of stimulating the housing market. However, we have heard today that the main emphasis with REITs seems to be on stimulating the commercial side of the market rather than the residential side. The success of REITs in the USA is arguably because there is no listing requirement at all, which the Chancellor does not seem to have acknowledged. The important point is that without such a requirement smaller, more flexible residential property companies, would be allowed to participate.
What do the Government really intend REITs to achieve? All the evidence points to the death of the original concept of stimulating investment in the residential property market. The hon. Member for Bury, South (Mr. Lewis), when he was Economic Secretary, said that
“one of the aims of introducing UK-REITs is to improve efficiency, affordability and professionalism in the private rented sector to the benefit of residential tenants.”—[ Official Report, 13 February 2006; Vol. 442, c. 1556W.]
However, my right hon. Friend the Member for North-West Hampshire has said:
“When the concept was originally considered, there was concern that it should not simply be a new vehicle for existing property companies. Consideration was given to a requirement that, in order to qualify for a REIT, one would have to add to supply.”
“Housing hardly gets a mention in the post-Budget comment on REITs.”—[ Official Report, 24 April 2006; Vol. 445, c. 422-23.]
Dave Ramsden, of Her Majesty’s Treasury, said:
“We would expect that REITs in the version we have ended up with—REIT UK, if copyright allows us to call them that but that is another story—are more likely to encourage flexible investment in commercial property. That is clear from the consultation. It does not mean that we will not get some residential property, I think we will get some but it is not going to be the main focus of the REIT.”
That is the point that we continue to make: REITs are stimulating not the residential housing market, but the commercial property market.
The debate over listing, however, consists of two main points. The argument for public listing—this is an important point that the Government make—is that it would subject companies to the appropriate listing authority rules regarding investor base, disclosure and market scrutiny, and would therefore help to ensure suitability for a wider retail investor base.
Dawn Primarolo: We have heard the hon. Gentleman recite what his hon. Friends think is important. We have heard him recite what the Government think is important. We have heard him recite also what Mr. Dave Ramsden thinks is important. When will the hon. Gentleman get around to telling us what he thinks is important and what the point of his speech is?
Mr. Newmark: The right hon. Lady must be patient. I am reaching my peroration, but not quite yet.
The arguments against listing involve allowing a company to develop initially as an unlisted UK REIT potentially to increase the size and scope of the market, of which we have heard much already.
Ed Balls: My right hon. Friend was most unfair to the hon. Gentleman. He made an important point a few moments ago. He said that in his view there is far too much house building in the south-east. That is the point of his speech, and we have all taken it on board.
Mr. Newmark: That is an interesting interpretation of what I did not say.
Mr. Newmark: I think that I will ignore the hon. Gentleman’s interjection. The hon. Gentleman says that he wrote it down, but he obviously was not paying attention.
Lee Nuttall, who is a real estate tax partner at Wragge & Co., said:
“It should be immaterial whether the investment comes from a private REIT or from a REIT recognised by the Stock Exchange. The expense of obtaining and maintaining a Stock Exchange listing will have an adverse impact on investor returns...It would be easy for the Government to squander this opportunity through over-regulation and a failure to listen.”
We criticise the Government for a lack of listening. Even the Financial Services Authority’s implementation of the transparency directive on investment entity listing review in March 2006 said:
“A successful REITS market should have both listed and unlisted vehicles in order both to allow maximum choice to investors of differing experience and size and also to provide a pooling facility for smaller REITS to develop outside a listed market until such time as they are ready and able to go public. This should be particularly helpful for smaller players in the market.”
The National Association of Real Estate Investment Trusts said:
“While we anticipate that a good number”—
“of currently listed property investment companies will convert to UK-REIT status, we expect further companies to list for the first time in order to qualify under these tax rules. As a result, these proposals will have a significant impact in this area.”
We have heard—it was an important point that my hon. Friend the Member for Rayleigh raised—that about 190 are publicly traded REITs in the USA, with assets totalling more than $475 billion. The shares of those companies are traded on major stock exchanges, which sets them apart from traditional real estate. Other REITs may be publicly registered, but non-exchange traded or even private companies. About 800 REITs are not registered with the Securities and Exchange Commission and do not trade on any stock exchange. Yet, as we have heard, the US is an extremely successful market. Even the Chancellor of the Exchequer, as we have heard, looks to the US as an example of where a successful REIT market has been developed, and one that we should emulate.
I am reaching my peroration. I say from the depth of my heart that I respect the Government’s cautious approach on deciding whether to have a fully listed requirement versus AIM. I would not go as far as to suggest that we follow the US example of having an entirely unregulated REIT market with no listing requirements at all, notwithstanding the success of the experience in the US. I ask the Government to reflect once again on the advantages of AIM, which has a simple listing requirement, a flexible regulatory approach and lower compliance costs. It is transparent, it is established and—this is an extremely important point—it is the world’s leading market for smaller companies. I am concerned that without further consideration of the proposal introduced by my hon. Friend the Member for Rayleigh, the Government will create an oligopoly of institutional investors. Instead of creating an inclusive, flexible and entrepreneurial REITs market, we will end up with a REITs market that is exclusive, inflexible and commercial.
Mr. Gauke: Like the Economic Secretary I, too, am a former member of the Oxford University Conservative Association but not, I confess, a very active one. At the few meetings I attended there were too many ambitious lefties hedging their bets.
Madam Deputy Speaker: Order. I will allow the Minister to reply, but I do not want the debate to develop into an Oxford Union debate.
Ed Balls: I apologise in advance, Madam Deputy Speaker, but does the hon. Gentleman agree that one was disinclined to go to too many meetings because one feared that one would have to listen to more speeches by the hon. Member for Braintree (Mr. Newmark)?
Mr. Gauke: I certainty do not agree, as my hon. Friend’s speech had comprehensive qualities and was delivered with impressive passion.
Sir George Young: It was very well informed.
I wish to consider whether condition 3, which requires REITs to be listed on a recognised stock exchange, is appropriate, as it excludes shares traded on the alternative investment market. My hon. Friend the Member for Rayleigh (Mr. Francois) made an eloquent case for the inclusion of such shares. In the Committee of the whole House, however, the then Economic Secretary, the hon. Member for Bury, South (Mr. Lewis), argued against doing so, and the present Economic Secretary referred to those arguments in Standing Committee. Three arguments have been deployed including, first, the assertion that REITs require full regulatory protection, presumably to avoid a scandal. REITs are new products, so one would not want something to go wrong in the early years by listing them on AIM, which is regarded as a higher-risk market.
We must, however, consider AIM’s role. My hon. Friend did so, and spoke about the market’s success. I, too, have visited the London stock exchange website, and the very first words on the AIM homepage state that the market is
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