Real estate deals can benefit from corporate 'wrapping'

Reflecting on activity by our Scottish practice last year, the transactional collaboration between Shoosmiths real estate and corporate teams is striking. Various factors contribute to deal shaping in the real estate market, including availability of funding and the legal and tax landscape. Increasingly, real estate deals are being managed within a corporate ‘wrapper’, to maximise profits and ring-fence risk.

An acute shortage of quality student accommodation is driving significant private sector interest in Purpose Built Student Accommodation (PBSA) deals, predominantly across Scotland’s central belt. Particularly in Glasgow, demand heavily outstrips supply. The later living sector is also robust, with attractive per-bed pricing available for developers on successful forward commit deals. Notably, our later living developer clients have strong pipelines, with social and community care an increasing focus of the UK Government.

The volume of corporate real estate transactions is growing, with private equity actively exploring value-add opportunities through indirect real estate investments. Investor and developer clients are acquisitive and expanding their portfolios. Their approach is strategic, first considering the structure of acquisitions, seeking advice on relevant fund pathways, warehousing assets in corporate special purpose vehicles (SPVs) and creating efficiencies for profitable return.

Kimberley Goh is a legal director, Shoosmiths

When real estate is transacted through an SPV, this acquisition is subject to stamp duty on the shares rather than Land and Buildings Transaction Tax (or Stamp Duty Land Tax) on the underlying property asset. This typically results in significantly lower acquisition tax liabilities, which on balance are still attractive despite other taxes being applicable. This structure also allows for more sophisticated investment strategies. This includes pooling development and construction expertise into joint ventures, or institutional investors curating equity structures in Real Estate Investment Trusts (REITs) which can be registered offshore and deliver investment return tax efficiently.

My inbox is awash with corporate real estate deals. However, in Scotland the Build-to-Rent (BTR) sector needs greater momentum. In England, we see high-value upper mid-market deals acting for our indirect real estate funds clients in their corporate disposals of significant BTR portfolios. Scotland lacks the same level of deal activity, despite a national housing emergency.

On the upside, despite the real estate investment and development markets remaining challenging, savvy investors, developers and alternative lenders are seeking out opportunities to transform tired assets, including underperforming office buildings/retail spaces, non-operational commercial premises or vacant/dormant land sites. Their objective is to profitably transform the assets into PBSA, mixed-use developments or BTR projects, increasingly through corporate acquisition and investment vehicles.

Naturally, there are headwinds influencing this dynamic and competitive development landscape, including a planning system in need of major overhaul. To purchase, develop and subsequently sell-on assets with planning permission can easily take two years in the current planning system. A significant period to await a return.

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Moreover, time will tell how measures announced in the Autumn Budget will impact on transactional activity, with the Capital Gains Tax increase on carried interest coming into effect next month.

Nevertheless, Scotland’s real estate space will continue to be attractive. We are the largest foreign investment market outside of London and demand continues to outstrip supply for modernised, energy-efficient accommodation, making Scotland an attractive destination for transacting on profitable development schemes. I envisage increasing competition for developments that incorporate green building practices, energy-efficient technologies and flexible design elements.

Consequently, whatever the real estate objective, corporate insight of appropriate vehicles to target and dispose of these assets will be key to unlocking opportunities and maximising tax-efficient returns.

Kimberley Goh is a legal director, Shoosmiths