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PwC Says That UK Hotel Sector Should Benefit From REITs Regime

by Robert Lee,, London

01 December 2006

PricewaterhouseCoopers says that the introduction of Real Estate Investment Trusts (REITs) in the UK will provide
significant financial opportunities that hotels can use to increase shareholder value.

From 1 January 2007, the hotel industry will be able to benefit from REITs immediately on implementation and should be considered in the context of all financial opportunities already open to the industry.

Rosalind Rowe, partner in real estate tax at PricewaterhouseCoopers LLP said: “REITs can provide a new source of capital for hotels looking to raise finance or return value to shareholders.

“However, hotels will need to be careful how they structure themselves to reap the full benefits of REITs because in the UK, owner-occupiers are barred from the REITs model.”

To be successful, says PwC, REITs will need good property from a range of sectors to boost their portfolios. This opens the doors for hotels to view their property in a new light and to also use it to restructure debt, raise capital for expansion and benefit from significant tax exemptions.

Rosalind Rowe added: “While REITs are attractive, there are two important considerations. Investors will be seeking a total return based on a sustainable income stream and the ability to realise capital growth through the sale of their REIT shares. So, REITs will need to have good quality tenants to provide a guaranteed income stream and well maintained properties to ensure capital appreciation. Hotels seeking to access capital from REITs will need to decide whether
to split themselves into two separate parts – an operating division and a property division (Opco/Propco structure) which is then sold off to ensure the full tax advantages are realised.

“Alternatively hotels can agree a sale/leaseback package with a REIT that sees the properties sold to the REIT and leased back to the operating division. This allows cash to be released for acquisition or development opportunities.”

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