Supermarket giant Tesco saw its shares hit a record high today on a report that it wanted to unlock more value from its £12bn (€17bn) property empire.
Tesco is considering placing its freehold assets into a Real Estate Investment Trust (REIT) and would use the money raised from selling shares in this entity to buy back its own stock, according to the Daily Telegraph.
It comes just days after Chancellor Gordon Brown announced the final plans for REITs in the Budget to the delight of the property industry which noted that several amendments had met many of their key concerns.
REITs will get the green light at the start of January and have been designed to encourage small investors to put their money into property because they are tax efficient.
Tesco finance director Andrew Higginson said: “We’re obviously interested in the sense that we are a big property company. We’ve got people looking at it to see whether it’s a good idea.”
No decision has been taken on what to do with the property assets and any move would need to be ratified by the Tesco board and possibly shareholders depending on the scale of the transaction.
But the report led to twice as many shares in Tesco changing hands compared with other FTSE 100 stocks in the early hours of trading, with the UK’s largest retailer rising 4% or 12p to 346.75p.
Philip Dorgan, an analyst at Panmure Gordon, said: “There is value in Tesco’s property portfolio and it is one of only a handful that could release it economically.”
Tesco’s global property portfolio had a book value of £13.1bn (€18.9bn) in its most recent annual report, with the freehold assets worth around £12bn (€17.3bn). Analysts believe only its UK assets – valued at £6.2bn (€9bn) – would placed into the REIT.
Under the new proposals unveiled by the Chancellor for REITs, the required proportion of net profits that must be distributed to shareholders will be 90% compared with the original threshold of 95%.
Developers wishing to convert to REIT status will have to pay a charge of 2% of the market value of the properties concerned – well down on the estimates of some commentators that it could be as high as 20%.
The Chancellor also ruled that rental income on REITs should cover interest costs by a minimum 1.25 times compared with the original expectation of 2.5 times, which many in the industry felt was too high.