The Real Estate M&A and Private Equity Review: United Kingdom

Overview of the market

The previous 12 months can be divided in two: the last three quarters of 2019 and the first quarter of 2020. Last year continued to be dominated by Brexit and the associated political wrangles. However, the uncertainty caused by when, how and if the UK was to leave the EU was put firmly into context by the covid-19 pandemic. On 24 July, Theresa May resigned as Prime Minister after failing to persuade Parliament that her Brexit deal with the EU was the right one for the country. She was replaced by a leading figurehead of the Leave campaign, Boris Johnson. The new Prime Minster significantly strengthened his position with a resounding victory in the December general election. In line with his get Brexit done campaign, the UK finally left the EU on 31 January 2020. Under Boris Johnson's slightly modified version of his predecessor's deal, the UK is currently in a transition period that is due to end on 31 December 2020.

Notwithstanding Brexit and the associated political uncertainty, the real estate M&A and private equity markets remained relatively positive throughout 2019, confirming the UK's position as a key part of the global real estate market. This year has, of course, been dominated by the devastating global impact of the covid-19 pandemic. The pandemic is without doubt the most significant and damaging event in a generation. This tragic event has taken its human toll with over 12 million global cases and more than 500,000 deaths. With the world's leading economies under lockdown, the covid-19 health crisis is set to become a global financial crisis. Unsurprisingly, real estate M&A and private equity activity has ground to a virtual standstill. In April, UK M&A activity volumes dropped by a staggering 99 per cent. There were just 35 deals with a total value of £409.1 million, the lowest monthly value level since September 1985. The picture is, of course, the same across the globe. The total value of global deals in April was £14.8 billion, the lowest since February 2002 during that year's market crash.

Real estate has been hardest hit by covid-19 with a sharp decline in values across all sectors. Retail and leisure were already in serious decline and have suffered the most, as footfall has dropped off a cliff. Any increase in online activity has fallen well short of compensating for the collapse in overall sales. Squeezed property companies have been caught in the middle, with their tenants unable or unwilling to pay rent and their funders continuing to look for interest and loan repayments. A number of major listed property companies, including Land Securities, Hammerson and British Land, have suspended upcoming dividends. The government has sought to encourage collaboration between landlords, tenants and funders and has introduced limited measures to prevent rogue landlords from taking enforcement action against struggling tenants. The message is that the situation is not the fault of any particular party and that all those involved are in this for the long term.

Perhaps not surprisingly, 2019 saw a reduction in real estate activity. Although high levels of interest remained, both buyers and sellers proceeded with greater caution, resulting in fewer deals. A pricing gap developed, buyers were concerned that real estate was overvalued and sellers were reluctant to lower their price expectations. In addition, owners enjoying healthy returns on their investments were reluctant to sell and risk having to find a better home for their capital. Low interest rates and low returns on government bonds have helped to ensure that UK real estate remains a safe haven for investors from around the world. The accumulation of global investment capital was expected to cause a surge in transactions as and when market conditions allowed. However, that optimism was, at that time, largely predicated on an orderly exit from the EU.

The office market continued to hold up relatively well despite the ongoing political and economic uncertainty. Many landlords had become less concerned about Brexit, as the much-anticipated collapse in demand failed to materialise and, in many respects, the industry had already allowed for Brexit and the associated fallout. The feared mass exodus of international businesses from London and the UK did not happen. Although companies had implemented post-Brexit strategies, relocations did not have a significant impact on occupier demand. Major deals in 2019 included British Telecom's relocation to One Braham, London E1, Linklaters' new London headquarters at 20 Ropemaker Street, WeWork's underlease of the European Medicines Agency's former offices at 30 Churchill Place, Canary Wharf (in all probability its last major acquisition for some time), Diageo's new headquarters at 16 Marlborough Street, W1, Derwent London's pre-letting of Soho Place, W1 and Knotel's flexible office partnership arrangement with Great Portland Estates in respect of City Place House, EC2. Although the construction pipeline is reasonably strong, much of the space has been pre-let, ensuring healthy competition for space. Outside of London, regional cities such as Manchester and Edinburgh proved particularly attractive for occupiers and investors. Both cities offer a strong talent pool combined with attractive amenities. While London will undoubtedly retain its attraction as a key global city in which to live, work and do business, evolving technology and flexible working practices have helped encourage growth in the regions, particularly in those towns and cities with a strong tech and media sector.

Notwithstanding WeWork's much-publicised woes, the inexorable rise of the serviced office sector continued and accounted for up to 30 per cent of all letting activity, ahead of the tech and financial sectors. Although WeWork had been the dominant force in the co-working sector, its retrenchment was more than compensated for by a plethora of new operators. The sector has become an established part of the market, including the development of sub-markets as operators that have sought to establish niche appeal. The sector has been driven by acute demand for good quality office space available on flexible terms and in well-located office buildings.

In the residential markets, overseas investors continued to focus on the private rented sector, with up to 11 per cent of UK private rental homes now let by foreign landlords. The figure in London rises to 18 per cent, where the residential investment market is more established. Across the country as a whole, healthy returns combined with favourable exchange rates and continued low interest rates have helped ensure continued interest in residential property. The main change was the emergence of new regional hotspots, while the once-dominant central London boroughs, such as Chelsea and Kensington and Westminster, continued to languish at the bottom of the table with flat or falling prices. The country's housing crisis continues as successive governments have failed to meet new build targets, and the UK's rising population will ensure that residential property will continue to provide opportunities for investors. There were even reports of the first signs of green shoots in the capital's super-prime market, prompting optimism for the rest of London.

The UK's retail sector continued to struggle and more household names, including Mothercare, Arcadia, Debenhams, Thomas Cook and Monsoon, joined the seemingly endless list of casualties. This has hit property companies and investors exposed to the high street as market rents and valuations have fallen. It was not all doom and gloom, with London's high-end retail boosted by continued demand from overseas visitors keen to take advantage of a weak pound. New Bond Street became the third-most-expensive global location for retailers (behind New York's Upper 5th Avenue and Hong Kong's Causeway Bay) and the most expensive in Europe. In the wider market, retail parks fared better than shopping centres and the UK's high street continued to shrink as vacancy rates increased. Traditional retailers continued to adapt to the changing habits of their customers. Online spend continued to increase in the retail and restaurant sectors with a particular surge in e-commerce sales from mobile devices. Investors have started to rethink how they see retail property and a number of recent schemes have sought to exploit the space for residential, leisure and other purposes. The industrial sector continued to attract investment, and well-located, high-specification distribution centres in the right locations continued to benefit from the boom in e-commerce.

Alternative assets have become an established part of the investment market, alongside the traditional office, retail and industrial sectors. The build-to-rent boom continued as institutional investors looked to increase their market share, and there has been an increase in the number of new projects in the construction pipeline, both in London and the regions. Confidence remained high for operators in the specialist retirement living and student housing sectors, where major institutional investors increased their portfolios. For example, Legal & General entered into a £4 billion partnership with Oxford University to provide student and staff accommodation and innovation space. The hotel and leisure sector continued to reap the rewards of a weak pound. Numbers of foreign tourists remained strong, and increasing numbers of UK residents continued to take staycations. More than 200 new hotels are currently planned for London, including the redevelopment of the former American Embassy on Grosvenor Square into a 137-bedroom luxury hotel. Alternative real estate assets have helped to create a more dynamic investment market, offering exciting opportunities in this rapidly evolving and increasingly important sector.

Loan originations in the UK's commercial property market rose despite the slump in investment activity across the country. There are always concerns of an overheated market whenever financing volumes exceed investment levels. However, lenders continued to be cautious when financing speculative developments and typically expected schemes to be at least 20 per cent pre-let. A diversified lending market has become the new normal as online platforms and peer-to-peer lending have joined debt funds, insurance companies and other non-bank lenders. The UK property finance market now closely resembles that seen in the United States. While activity from German banks has declined, the slack has been taken up by UK and American banks, as well as funds and insurers. The market almost inevitably remained focused on London, but debt funds have shown increased interest in the regions.

The above seeks to provide a summary of the market in 2019. In 2020, the world has become a very different place. We have not witnessed a global event of this magnitude in modern times. Covid-19 has brought real estate activity to a grinding halt and has had a profound effect on how we all live, work and relax. Some governments have started the gradual process of lifting their lockdowns, but it is clear that confidence will not return fully until a vaccine is developed and that vaccine becomes widely available. By which point, aspects of how we design, build and use real estate may have changed forever.

Recent market activity

  • Inc & Co Property Group acquired Prospect Business Centres.
  • The Freshwater Group acquired a 20.54 per cent stake in Daejan Holdings PLC.
  • Robertson Group acquired a 50 per cent stake in Urban Union from McTaggart Construction.
  • A 50 per cent stake in MEPC has been acquired by Hermes Fund Managers from the BT Pension Scheme.
  • London & Quadrant Housing Trust acquired housing association Trafford Housing Trust.
  • Robigus Limited acquired Strutt & Parker (Farms) for £200 million.
  • Galliford Try Partnerships has agreed to acquire Strategic Team Group.
  • Toscafund Asset Management acquired a 64.65 per cent stake in eProp Services.
  • London Metric Property acquired A&J Mucklow Group.
  • Assura acquired General Practice Investment Corporation, a UK developer of primary healthcare centres, for £92 million.
  • Charitable housing association Peabody acquired Town and Country Housing Group.
  • Tritax Big Box REIT acquired an 87 per cent stake in DB Symmetry from Delancey Estates.
  • Primary Health Properties and MedicX Fund have agreed an all share merger.
  • Flagship Group acquired Victory Housing Trust.
  • Endless acquired BSW Timber from the Brownlie family.
  • 3i infrastructure has agreed to sell its projects portfolio for £194 million to buyers including Dalmore Capital, Innisfree and Semperian.
  • Inflexion Private Equity acquired Goals Scorer Centres.
  • Vituvian Partners acquired a majority stake in Sykes Holiday Cottages from Livingbridge for £375 million.
  • Ancala Partners acquired a 45 per cent stake in Liverpool Airport from Peel Holdings and Liverpool City Council.
  • Safestore Holdings acquired Salus Services Limited.
  • Bridges Fund Management acquired Energie Direct Franchising as part of a management buyout.
  • Sovereign Capital Partners acquired car park operator Premier Park.
  • A consortium led by Glendower Capital acquired a 40 per cent stake in Liberty Retail from BlueGem Capital Partners.
  • Bregal Freshstream has agreed to acquire a majority stake in Away Resorts, an operator of resort and caravan parks.
  • Pensions Infrastructure Platform acquired a portfolio of onshore windfarms from Scottish Equity Partners.
  • ITV sold London Television Centre to Mitsubishi Estate London for £145.6 million.
  • M&G Prudential acquired 40 Leadenhall from AIMCo and Nuveen Real Estate for £875 million.
  • Delancey acquired Capco's interests in the Earls Court redevelopment for £425 million.
  • Brockton Capital acquired 169 Union Street from Janus Henderson for £95 million.
  • Cindat Capital Management acquired and subsequently disposed of 30 South Colonnade to Quadrant Estates and Oaktree Capital for approximately £135 million.
  • M&G Real Estate sold Renaissance House, Croydon to Royal London for £60 million.
  • Unite acquired Liberty Living's UK portfolio for £1.4 billion.
  • Goldman Sachs acquired Crawley Business Park, Watford for £400 million.
  • Riverstone Living acquired a retirement living scheme in Croydon for £300 million.
  • DWS acquired the Vita student portfolio for £600 million.
  • NTT Urban Development Corporation acquired 130 Wood Street.
  • A Hong Kong private investor acquired Standbrook House for £152.5 million.
  • Stamford Land Corporation acquired 8 Finsbury Circus from Mitsubishi Estate London for £260 million.
  • Greycoat and Cheyne Capital sold 8 Salisbury Square to a Hong Kong investor.
  • BT sold 81 Newgate Street to Orion for £210 million.
  • Blackstone acquired a portfolio of logistics sites from Clearbell Capital for £120 million.
  • Blackstone sold a building at Chiswick Park to Stanhope for £312 million.
  • HNA Group sold 17 Columbus Courtyard for £110 million.
  • Greystar and Henderson Park acquired the former Royal Mail depot at Nine Elms for £101 million.
  • The Barclay family sold the Ritz Hotel to a Qatari investor.
  • King Street Capital and Arax Properties acquired 125 London Wall for £298 million.
  • Citigroup purchased 25 Canada Square for £1.1 billion.
  • Lazari Investments acquired 23 Savile Row for £277 million.
  • GAW Capital disposed of Waterside House for £220.5 million.
  • Realty Income acquired a portfolio of Sainsbury's supermarkets from British Land for £429 million.
  • Costain's firm placing and open offer of new shares raised £100 million.
  • SEGRO European Logistics Partnership issued €500 million guaranteed notes on the Irish Stock Exchange.

Real estate companies and firms


The UK REIT regime came into force in January 2007. It exempts from corporation tax the income and capital gains of a UK REIT's property rental business. The income and capital gains of any other business, including from acquiring or developing property for sale, is taxed at the main corporation tax rate. While not all property companies are REITs by any means, the largest corporate real estate groups are structured as REITs to benefit from these tax advantages. As a result, M&A involving UK REITs will have specific considerations that will need to be taken into account.

Main conditions

A UK REIT can consist of either a single company or a group of companies. The basic conditions that must be met by the company or parent company of a group are:

  1. it must be resident only in the United Kingdom for tax purposes;
  2. it can have only one class of ordinary shares, which must be admitted to trading on a recognised stock exchange, and either listed or actually traded on such an exchange;
  3. it must not be a close company (a company that is controlled by five or fewer shareholders), although close companies that are controlled by certain institutional investors, such as pension funds, charities, certain collective investment schemes and other REITs, are allowed; and
  4. the property rental business must constitute at least 75 per cent of the total profits and assets of the company or the group.

There are also diversification rules requiring a business to hold at least three properties, each representing no more than 40 per cent of the total value of its portfolio.

To ensure that the property income generated by a property rental business is ultimately taxed, at least 90 per cent of the income profits of the business must be distributed annually by way of dividends. A UK REIT is subject to a tax charge to the extent that it falls short of this.

A leverage requirement is also imposed such that the gross income of a UK property rental business must cover the external financing costs of the entire property rental business by a ratio of at least 1.25:1. Again, a tax charge is imposed on UK REITs to the extent of any excess financing cost.

Takeover of a UK REIT

If a UK REIT, whether a single company or a group, becomes part of another REIT, it will remain within the UK REIT regime as long as the conditions continue to be met. A takeover may well cause the company (or parent company of a group REIT) to become a close company unless the terms of an acquisition are such that at least 35 per cent of the ordinary shares remain in public hands. UK and equivalent foreign REITs are now recognised as institutional investors, which should deal with that point in most cases – however, it will not always be the case that a foreign entity labelled as a REIT will be equivalent to a UK REIT, so a degree of circumspection is required. In a cross-border context, the impact of the leverage requirement – in that it looks at gross income of the UK property rental business only but takes into account the external financing costs of the worldwide property rental business – will need to be considered.

ii Recent developments

The introduction of UK REITs in 2007 coincided with the beginning of a major downturn in the commercial real estate market. UK REITs were conceived during a UK property boom and consequently faced challenges during the financial crisis.

However, as property prices have recovered, there has been a renewed interest in UK REITs as a tax-efficient investment structure, especially following the abolition of a 2 per cent entry charge on seeding assets in 2012. The UK REIT regime is an improvement to the tax environment for UK real estate companies and has consequently had a positive impact on the UK-listed real estate sector. That said, the recent introduction of the indirect chargeable gains charge (discussed in more detail below) has possibly soured things a little by making disposals by non-residents of holdings in UK REITs subject, in principle, to UK tax.

The UK REIT sector now includes some of the United Kingdom's largest real estate companies, such as Land Securities, Derwent London, British Land, SEGRO, Great Portland Estates, Hammerson and Canary Wharf Group. The number of UK REITs has grown significantly in recent years (including externally managed UK REITs) to over 50.

iii Real estate private equity firms


In the United Kingdom, real estate private equity firms can be structured in a number of ways. As a result of regulatory and tax issues, which affect the operation of a fund and its investors, the most common structure in the United Kingdom is an English (or Scottish) limited partnership. These vehicles have no legal status in their own right; they exist only to allow the partners to act collectively. Each partnership:

  1. has a finite life (usually 10 years with a possible two-year extension, although some have investors with rolling annual commitments);
  2. has one general partner with unlimited liability for the liabilities of the partnership;
  3. has a number of limited partners (LPs) whose liability is limited to the amount of their equity investment in the partnership; and
  4. is managed by an investment manager on behalf of all the partners.

The investment manager is a separate entity (owned collectively by the private equity fund managers). It is structured as a partnership (often an offshore limited partnership). The manager receives a fee from each fund it manages.

The general partner is a company owned by the investment manager and, in compliance with the Limited Partnerships Act 1907, must have unlimited liability for the liabilities of the private equity fund. However, the individual partners cap their liability by investing through a limited company. Individual partners of the private equity fund manager are required to invest their own money directly in the fund (usually between 1 and 5 per cent of the fund).

External investors are LPs. Their total liability is limited to the amount of capital they have invested. LPs themselves may be structured as corporations, funds or partnerships.


Private equity firms have been major investors in UK real estate in recent years. Investment has been made across a wide range of sectors including hotels, residential schemes, housebuilding, healthcare, student housing, restaurants, serviced offices, logistics and retail.

Private equity firms have continued to raise large amounts of capital for investment in UK and European real estate and investment activity has been buoyed by the relatively low risk opportunities afforded by real estate in terms of a reliable income stream and capital growth.


i Legal frameworks and deal structures

Legal frameworks

When investors acquire or dispose of real estate in the United Kingdom, the majority of deals do not involve a transfer of title to the relevant property from the seller to the buyer. While smaller deals may involve the direct transfer of real estate assets, for a number of reasons (the main driver is often tax, as outlined below), the acquisition or disposal of real estate assets is made through share purchases of corporate vehicles that own the property in question. It is unusual for there to be a direct transfer of real estate.

Various structures are used to acquire and hold real estate. The optimum structure will depend on, in each case, a number of factors and considerations (including funding, tax and exit routes (for private equity funds)). Typical structures include:

  1. companies limited by shares: body corporates with a legal personality distinct from those of their shareholders and directors; these companies are governed by the Companies Act 2006;
  2. limited partnerships: discussed above in relation to private equity firms;
  3. limited liability partnerships (LLPs): bodies corporate with a legal personality distinct from those of their members. Members have limited liability in that they do not need to meet the LLP's liabilities. They are governed by the Limited Liability Partnerships Act 2000 and the Companies Act 2006;
  4. joint ventures: there are no laws relating specifically to joint ventures under English law. Their structure will be determined by the nature and size of the enterprise, the identity and location of the parties and their commercial and financial objectives. The relationship between the parties will be subject to, depending on the structure, general common law rules, the legislative provisions of company and partnership law and the provisions of the joint venture agreement;
  5. trusts of land: any trust that includes land as part of a trust property will be a trust of land. Trustees have the power to sell the property, but no obligation to do so, unless this is expressly provided for. They are governed by the Trusts of Land and Appointment of Trustees Act 1996; and
  6. REITs.

Deal structures

Share acquisitions with cash consideration remain the predominant form of real estate transaction structure. This is likely attributable to the relative simplicity of completing a transaction structured as a share acquisition and, from a valuation perspective, the certainty of receiving cash consideration.

Fixed-price transactions (often in the form of locked boxes) are the structure of choice for private equity sellers, although they are increasingly used by trade sellers conducting auctions. Earn-outs and deferred consideration are not common features of the UK real estate M&A market.

Post-completion adjustments to the purchase price are also a common feature, particularly where there is a delay between signing and completion (see below). Adjustments are most commonly made to account for variations in working capital and net debt.

The use of escrow structures has also increased in the real estate private equity M&A market as a way to make contractual claims in respect of warranties and post-completion purchase price adjustments.

Acquisition agreement terms

As previously noted, typically real estate assets will change hands through a sale of the shares in a corporate vehicle that owns those assets. As with any share deal, the buyer will take on the target's existing liabilities and commitments and the seller will provide warranties and certain indemnities. The title to the real estate assets will usually be certified by the seller's counsel.

The extent of the sales and purchase agreement (SPA) provisions will vary depending on the nature of the transaction, the real estate assets in question and the due diligence undertaken. However, there are a number of aspects to consider.


A number of conditions may need to be satisfied before a real estate transaction can complete (such as obtaining planning permission, third-party consents or even practical completion of a property development). Any such conditions must be satisfied or waived before the real estate transaction can complete.

Splits between signing and completion

For any split between signing and completion, several practical matters should be considered, including whether:

  1. shareholder (or equivalent) approval is required by either party;
  2. EU merger clearance is required;
  3. any warranties given at signing need to be repeated at completion;
  4. rescission is possible between signing and completion;
  5. any deposit paid at signing should be returned to, or forfeited by, the buyer if the transaction does not complete; and
  6. management of the underlying properties is required and, if so, whether the buyer will exercise control.


Where there is a split between signing and completion, this may affect whether a buyer is able to negotiate a rescission right, as mentioned above, during that time.

Where sellers are required to obtain shareholder approval for a real estate transaction after signing but before completion, it will be difficult for them to argue that during this period the buyer should face the potential risks and be unable to rescind.

In contrast, where the reason for a split is as a result of the time required by the buyer (e.g., to procure debt finance), it is less likely the buyer will be able to negotiate a rescission right for anything other than material breach of any restrictive conduct provisions.

Buyer protections

In UK real estate acquisitions, buyer protections are particularly important as the buyer is not afforded any statutory or common law protection on acquisition; caveat emptor (buyer beware) applies. Where a buyer purchases a target group and is to inherit all related obligations, liabilities and commitments, a robust package of warranties and appropriate indemnities will be required from the seller. These will normally be limited to the corporate vehicle and taxation matters; the buyer will usually be expected to satisfy itself on title to the real estate assets through a normal due diligence exercise or reliance on certificates of title issued by the seller's lawyers. Recently we have seen a move towards title insurance as a way for buyers to deal with title due diligence, sometimes in combination with purchaser due diligence or certificates of title, or both of these. A combination of approaches is not uncommon on portfolio deals with properties of various values or significance.


Although sellers (particularly private equity sellers) will not want to provide a large number of warranties on the sale of real estate assets, they are important to provide buyers with some contractual protection. An SPA will not generally include long-form property warranties; the buyer's property enquiries will be answered by the seller in the form of representations.

Buyers are increasingly succeeding in extending the scope of warranty coverage, although sellers often succeed in disclosing all due diligence information against such warranties. Private equity sellers have also conceded business warranties on occasion (however, these tend to be in respect of identified issues that cannot be addressed through further diligence or otherwise reflected in the price).

The repetition of warranties at completion is usually limited to core warranties regarding title to shares or real estate assets and the capacity and authority of the seller to enter into a transaction.


Where a buyer identifies (through due diligence) a particular risk or liability that it is unwilling to assume (e.g., environmental risks or planning liabilities) and that risk is not easily quantifiable, specific indemnities will be sought, shifting the exposure to the seller. Warranty claims are difficult to make in practice, so indemnities are preferable from the buyer's perspective. Sometimes title insurance to protect against a specific title defect can be obtained.

Seller protections

The limitations on a seller's liability under an SPA will be dependent on the particulars of each transaction. In practice, however, the parties will agree that certain warranties (i.e., core warranties) will be capped at the overall consideration for the deal. Depending on commercial and competitive pressures, there may be a different cap on liability for other warranty breaches (e.g., 15 to 20 per cent of the overall consideration).

General warranties are likely to have a duration of 18 months to two years, while tax warranties are more likely to have a duration of four to six years. There is also likely to be a de minimis threshold that must be reached before a claim is brought.

As previously noted, the seller's exposure under the warranties will be limited by the disclosures made in the disclosure letter (which the buyer will ensure are sufficiently detailed so that a view can be taken on its liabilities).

There is a growing tendency for both sellers and buyers to obtain warranty and indemnity insurance in the UK M&A market. Insurers such as Aon and Willis are increasingly marketing their willingness to offer warranty insurance, although they expect that careful due diligence will be carried out in the normal way by the buyer. This trend has been driven by sellers seeking a clean exit – a broader set of warranties can be presented with limited post-completion financial exposure. Similarly, buyers are arranging insurance to supplement or cover gaps in the protection provided by sellers – securing sufficient protection can allow buyers to proceed with a transaction without raising a seller's exposure and potentially prejudicing the competitiveness of any offer.

ii Financing considerations

Real estate investors are usually backed by a mixture of debt and equity. Lenders will require typical security packages in relation to real estate lending, which will consist of:

  1. charges by way of legal mortgages over real estate assets;
  2. charges over rents receivable;
  3. potential charges over bank accounts into which rents are paid; and
  4. additional charges over certain contracts (such as leases, insurance policies and development and construction contracts).

Depending on the circumstances, lenders may also seek protection against borrower default through conditions precedent and direct covenants in the facility agreement, property valuations, parent company guarantees and bonds, and cash collateral, and by obtaining floating charges from the parent company.

Where development and construction are anticipated, lenders may also require approval of material development documentation as a condition precedent to drawdown and may expect to receive collateral warranties or third-party rights from contractors, designers and key sub-contractors. Step-in rights may also be sought to take over a contract in the event of default.

iii Tax considerations

Stamp duty land tax (SDLT) is payable by the buyer of commercial real estate and is a percentage of the purchase price, varying depending on the consideration paid for the property. SDLT is currently payable at 2 per cent on the portion of consideration between £150,001 and £250,000, and 5 per cent on the portion of consideration above £250,000. For investors to avoid paying high tax rates for individual real estate assets, it is better for the shares in the vehicles themselves to change hands. SDLT does not apply to the purchase of shares in companies holding real estate assets (at least, not yet – see below). The rate of stamp duty on the transfer of shares in a UK-incorporated company is 0.5 per cent.

If real estate assets are sold and purchased directly, the default position is that the sale or purchase in the United Kingdom is not subject to VAT, although owners can opt to tax property at the standard rate of 20 per cent. Generally, most owners opt to tax – the exceptional cases tending to be where the occupational tenant is one with restricted VAT recovery, such as a bank or insurer. Where a property is currently let or a letting has been agreed, VAT can be mitigated by ensuring the sale is treated as outside the scope of VAT as a transfer of a business as a going concern, provided the buyer continues letting the business and opts (and notifies HMRC that it has opted) to tax. Otherwise, even if the buyer can recover all of the VAT charged on the sale, the VAT amount will count as part of the consideration on which the SDLT charge is calculated and thus create an absolute cost in all cases.

Interest charges on borrowings are, generally speaking, deductible expenses for tax purposes, so gearing will generally result in tax efficiency. Many real estate investors introduce borrowing to achieve this result. In such circumstances, it is important that any loan arrangement is at arm's-length. Loans that do not meet that commercial threshold will not qualify as being deductible.

With effect from April 2017, the UK introduced a new restriction on the deductibility of debt finance for corporation tax purposes, similar to those that have existed for some time in other jurisdictions (such as Germany). The UK regime limits interest deductions to 30 per cent of a group's taxable EBITDA. The intention is more to discourage groups shifting a disproportionate amount of debt into the UK than to attack debt finance as such. Accordingly, groups that are highly geared on a worldwide basis may benefit from making an election that permits the use of a percentage based on the ratio of the group's net interest expense to its global accounting EBITDA. There is also an exemption for third-party debt incurred by infrastructure companies that, somewhat generously, extends to companies carrying on a UK property letting business (provided the leases in question are to third parties and do not exceed a duration of 50 years).

A significant change to the taxation of offshore investors in UK real estate was announced as part of the 2017 Budget. With effect from April 2019, non-resident companies became subject to tax on profits and gains arising from holding or disposing of UK real estate in the same way as UK resident companies. Previously, non-resident investors paid only income tax on rents, and, although disposals of residential property by non-residents have been subject to capital gains tax since 2015, the new tax charge covers all forms of UK property. A more surprising part of this package was that non-residents that dispose of indirect interests in UK property (essentially, shareholdings in UK property-rich companies or collective investment schemes) are now in principle liable to UK tax on any gain, subject to any exemption and the terms of any applicable double taxation treaty. A company will be UK property-rich if more than 75 per cent of its gross asset value is attributable to UK real estate (whether held directly or via subsidiaries). A non-resident will be subject to tax on any gain if it holds a 25 per cent or greater interest in the company, or has done so within the preceding two years and with interests held by connected parties being aggregated. However, investors in collective investment schemes (including UK REITs) do not benefit from this 25 per cent threshold unless the vehicle they invest in is widely held and is marketed as being invested as to no more than 40 per cent (by market value) in UK real estate. The UK has not before attempted to tax non-residents in this way, and this change has received much negative comment. It is also widely seen as a precursor to the introduction of indirect SDLT, similar to the German real estate transfer tax, although no formal proposals for this have yet been announced.

Outlook and conclusions

More than ever it is impossible to predict the future: covid-19 has thrown much of what we know and trust into confusion. The pandemic has had a profound effect on how people around the world live and work. Although a crystal ball is required to determine the outlook for the real estate M&A and private equity sectors, some trends are starting to emerge.

Last year, despite WeWork's much-publicised woes, we were looking at the inexorable rise of the serviced office sector. Although flexible working practices will clearly become a more accepted part of how we work, the lockdown has also confirmed that face-to-face contact is a key part of our working lives. Although fewer workers may need to be in the office, those workers will be more conscious of social distancing, and businesses will need to comply with new rules and regulations as to how space can be used. The industrial sector has fared best in the current crisis. Demand for logistics space remains strong to meet the requirements of internet shopping and UK-wide distribution. In particular, there has been a spike in demand for storage space for non-perishables that cannot be sold and a move to refocus existing buildings for distribution and storage use. The industrial sector has become the top performer and the new safe haven for investors. With the exception of the major supermarkets, the retail and leisure sectors face an uncertain future and we will see further insolvencies and restructurings. Even when lockdown is fully lifted, it will take some time for confidence to return and footfall to return to viable levels. Rental structures are likely to evolve to enable landlords and tenants to share the pain and gain by reference to turnover and commercial success. Out of town retail parks that lend themselves to social distancing requirements may recover ahead of traditional high street outlets. It will be fundamental that people feel safe where they live, work and relax. The normally robust hotel sector may also take time to recover as confidence returns and travel restrictions are lifted. The serviced apartment sector will benefit as people prioritise their own personal space and facilities. Demand for housing is likely to remain strong in the residential sector, although the lockdown may involve a rethink in the design and location of new developments. Those finding themselves working from home on a much more regular basis may start to prioritise space over location and convenience.

It was hardly surprising that there was a slump in real estate M&A and private equity activity in 2019, the year that Brexit was supposed to happen. The covid-19 pandemic has put concerns about leaving the EU into perspective. In order to recover, the market needs certainty, and that certainty will only arrive once the covid-19 threat is contained. If and when an effective vaccine is widely available, renewed optimism is likely to prompt a surge in activity. Until we reach that point, although there will be some distressed M&A opportunities, volumes will remain flat. There is no shortage of global capital, and it is reasonable to believe that UK real estate will remain high up on global shopping lists. London in particular will retain its position as a leading global city. However, competition will be strong, and the UK must work hard to ensure that it remains attractive as a place in which to invest and do business. Much will depend on the steps taken to stimulate the economy by a government saddled with increased debt. To that extent at least, the world has become a more level playing field. It is sincerely hoped that next year's edition brings with it much more positive news, and it will be interesting to see the shape of the global recovery.



1 Richard Smith is a partner, Ed Milliner is a senior counsel and Graham Rounce is a professional support lawyer at Slaughter and May.

Get unlimited access to all The Law Reviews content