Chancellor stamps down on pub group Reits

There is now little chance of a managed pub operator or tenanted pubco converting to tax efficient Real Estate Investment Trust (Reit) status following the Pre-Budget Report.

The Government said it would introduce legislation in the Finance Bill 2009 to stop companies carrying out an internal restructuring process to take advantage of the scheme.

To convert to Reit status, 75% of income has to come from rent. Chancellor Alistair Darling said he wanted "to restore the original objectives of the UK Real Estate Investment Trusts (UK REITs) regime by preventing groups of companies which own property, but are not property rental companies, from being part of the UK REITs regime unless at least 75% of their gross income comes from the rental of property to tenants."

This would seem to rule out managed operators restructuring into an operating company (opco) and a property company (propco).

Certainly, this is how Mitchells & Butlers viewed the decision as it ruled out conversion this morning.

"Given the recent Treasury announcement to exclude internal re-organisations from the Reit regime, the need for cash conservation and the current Group tax position, we have no plans of adopting any such structure for the foreseeable future," it said.

Tenanted pubcos​

However, tenanted pubcos, such as Punch and Enterprise, have not been completely ruled out of the process but it now depends on what view the Treasury takes on wet rents.

Blue Oar Securities analyst Mark Brumby said: "We believe that it is taking a robust view on wet rents and is not inclined to include them in the 75% figure.

"We consider that there are very long odds against the managed operators converting and that there is little greater chance that the tenanted players will be allowed to do so."

He added: "The price of attempting to do business with the Government may have been a high one as millions of pounds must have been spent on legal, accountancy and other advice across the on-trade as a whole."