Pub groups could qualify as REITs, say analysts

Pub operators could convert to real estate investment trusts (REITs) without splitting into separate operating and property companies if the Government re‑evaluates its definition of rental income, analysts have said.

The major pub groups have so far ruled out conversion to REIT status - which allows companies to invest in new property without paying corporation tax - claiming they could not see the benefit at this stage.

They have also been dissuaded by rules stating that companies can take advantage of REITs only if they make no more than 25% of their income from non-property sources.

But Deutsche Bank has urged pub companies to lobby HM Revenue & Customs (HMRC) to define beer sales and property rent as combined income.

Deutsche Bank analyst Geof Collyer argued that beer sale agreements between the tenant and the operator work on such an exclusive basis that they are, in effect, "wet rent".

He urged pub companies to persuade HMRC that beer sales were a fundamental part of the rent agreement between the pub company and the tenant, which, if accepted, would take the property-related portion of their income over the 75% threshold.

Enterprise Inns, the most likely group to convert, according to Collyer, continues to investigate the possibility. Chairman Hubert Reid said this week he was exploring with advisers whether the company could meet the qualifying criteria to become a REIT without the need for material restructuring.

Punch Taverns chief executive Giles Thorley has said there is "no evidence" to show that a REIT conversion would value the sum of the parts of the business greater than the whole.

Fellow FTSE100-listed pub company Mitchells & Butlers is expected to make an announcement about its REIT status when its interim results are published on 22 May.

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By Christopher Walton

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