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CIS 5A.8 Property schemes

Application

CIS 5A.8.1R

This section (CIS 5A.8) applies to authorised fund managers of property schemes, except CIS 5A.8.11 R (1) (Initial periods), which also applies to the trustee of an AUT that is a property scheme.

Introduction

CIS 5A.8.2G
  1. (1)

    This section (CIS 5A.8) sets out specific rules for property schemes, which can invest in property, whether in the United Kingdom or abroad.

  2. (2)

    Property schemes are authorised funds which may invest in approved immovables and property, related assets with or without other transferable securities. Under this section (CIS 5A.8) a property scheme may not invest in immovables until £5 million has been subscribed or agreed to be subscribed. Under CIS 12.3.4 R(Failure to obtain minimum subscriptions) if this amount is not subscribed for during the period of the initial offer (or during the first 21 days after the date on which persons are first invited to become holders in the property scheme, where there is no initial offer) the authorised fund manager must use its best endeavours to enable the property scheme to be wound up. Provided the property scheme obtains £5 million or more, it may then be invested within a band of 20%-80% in approved immovables as described in CIS 5A.8.4 R (Permitted immovables) and CIS 5A.8.5 R (Approved immovables).

  3. (3)

    For property schemes below £15 million in size there is, for up to two years, some transitional relief from some of the limits: in the early period a property scheme of small size may not be able to achieve the spread between different properties and other investments, appropriate for ongoing property schemes (see CIS 5A.8.11 R(3) (Initial period)).

  4. (4)

    The remainder of the scheme property (also 20% - 80%) must be either invested in so-called property related assets (typically shares in a property investment company which must themselves be approved securities or else within one of the other special limits in this section) or in government and public securities, but subject to a maximum of 35% for such securities. In addition, 5% may be invested in property related collective investment schemes.

  5. (5)

    To help illuminate this section, CIS 5A.8.13 G(Construction of property schemes) gives two examples of how a property scheme may be constructed, and outlines how the spread rules will apply to those property schemes. Property schemes A and B are each invested at opposite ends of the 20%-80% band.

Property schemes: general

CIS 5A.8.3R
  1. (1)

    The scheme property of a property scheme must, except where otherwise provided in the rules in this chapter, only consist of any or all of :

    1. (a)

      approved immovables;

    2. (b)

      property related assets;

    3. (c)

      government and public securities; and

    4. (d)

      units in collective investment schemes, under (5).

  2. (2)

    Not more than 80% in value of the scheme property is to consist of approved immovables, but this limit is subject to (6).

  3. (3)

    Not more than 80% in value is to consist of transferable securities, but the transferable securities must be property-related assets which are approved securities or else separately permitted under (4), (5) or (6).

  4. (4)

    Not more than 35% in value is to consist of government and public securities.

  5. (5)

    Not more than 5% in value is to consist of units in collective investment schemes under CIS 5A.8.7 R(Investment in collective investment schemes).

  6. (6)

    Not more than 10% in value is to consist of shares which are property-related assets but are not approved securities. Any shares included under this paragraph must be included in the 80% limit in (2), which may therefore on occasion produce a limit of 70% for approved immovables.

  7. (7)

    Not more than 5% in value is to consist of transferable securities within (3) which are warrants. These warrants must be property related assets which are approved securities.

  8. (8)

    The following also apply to property schemes:

    1. (a)

      CIS 5A.2(General investment powers and limits for authorised funds);

    2. (b)

      CIS 5A.4.6 R(Investment in warrants and nil and partly paid securities);

    3. (c)

      CIS 5A.13(Efficient portfolio management);

    4. (d)

      CIS 5A.14(Stock lending);

    5. (e)

      CIS 5A.15(Cash, borrowing, lending and other provisions); and

    6. (f)

      CIS 5A.16(Cover for sales).

Permitted immovables

CIS 5A.8.4R

An interest in land or a building is a permitted immovable if:

  1. (1)

    the land or building is situated in a country or territory identified in the prospectus for the purpose of this rule (CIS 5A.8.4 R);

  2. (2)

    the land or building is situated in England and Wales or in Northern Ireland, and the interest is a freehold or leasehold interest; or if the land or building is situated in Scotland and the interest is any interest or estate in or over land or heritable right including a long lease; or if the land or building is situated elsewhere and the interest is equivalent to any of the interests mentioned in this paragraph; and

  3. (3)

    where the interest is leasehold (or its equivalent) and it has an unexpired term of 20 years or more;

and furniture, fittings or other contents of any building may for this purpose be regarded as part of it.

Approved immovables

CIS 5A.8.5R
  1. (1)

    In this sourcebook, an approved immovable is a permitted immovable which satisfies all of the conditions in (3) to (6) and either (2)(a) or (2)(b).

  2. (2)
    1. (a)

      Unless (b) is satisfied, the immovable must be transferable; an immovable is not regarded as transferable unless the manager or the ICVC has received a report from an appropriate valuer that:

      1. (i)

        contains a valuation of the immovable (with and without any relevant subsisting mortgage); and

      2. (ii)

        states that, in the appropriate valuer's opinion, the immovable would, if acquired for the property scheme, be capable of being disposed of reasonably expeditiously at that valuation.

    2. (b)

      Unless (a) is satisfied, the approved immovable must have marriage value; an immovable is not regarded as having marriage value unless the manager or the ICVC has received a report from an appropriate valuer valuing the immovable and stating that:

      1. (i)

        the immovable is adjacent to or contiguous with another immovable included in the scheme property; and

      2. (ii)

        in the opinion of the appropriate valuer, the total value of the immovable, if acquired for the property scheme, and of the other immovable, would at least equal the sum of the price payable for the immovable and the existing value of the other immovable.

  3. (3)

    The immovable must be accessible; an immovable is not regarded as accessible unless the authorised fund manager has taken reasonable care to determine that reasonable access to it is assured.

  4. (4)

    The immovable must have a good root of title; an immovable is not regarded as having a good root of title unless the authorised fund manager has taken reasonable care to determine that the title to the immovable is a good marketable title.

  5. (5)

    The immovable must be unencumbered or adequately unencumbered; an immovable is not regarded:

    1. (a)

      as unencumbered, unless there is no subsisting mortgage over or on it; and

    2. (b)

      as adequately unencumbered, unless the only mortgages over or on it are one or more approved mortgages within CIS 5A.8.9 R (Mortgaged property), which secures, or together secure, on the immovable repayment of a sum or sums not exceeding 50% of the value at (2)(a) (that is, that part of the value which is valued on the assumption that the immovable is not mortgaged).

  6. (6)

    The immovable must be or have been or is to be bought promptly and at a reasonable price; an immovable is not regarded as bought promptly and at a reasonable price unless:

    1. (a)

      it is bought or agreed by enforceable contract to be bought within six months after receipt of the report of the appropriate valuer referred to in (2)(a) or (2)(b);

    2. (b)

      at the time of the purchase or agreement it would not have been apparent to the authorised fund manager that the report could no longer reasonably be relied upon; and

    3. (c)

      the immovable is bought at no more than 105% of the valuation in the report.

  7. (7)

    A person is an appropriate valuer if:

    1. (a)

      he has knowledge of and experience in the valuation of immovables of the relevant kind in the relevant area;

    2. (b)

      he is or is qualified to be the standing independent valuer of a property scheme or is reasonably considered by the property scheme'sstanding independent valuer to hold equivalent qualifications;

    3. (c)

      he is independent of the ICVC, the depositary and each of the directors of the ICVC or of the manager and the trustee of the AUT in the sense required for a standing independent valuer under CIS 12.3.1 R (2)(Standing independent valuer); and

    4. (d)

      neither he nor any of his partners (if any) nor a fellow director of a corporate appropriate valuer (if any) have been engaged, whether as principal or as agent, in relation to the finding of the immovable for the property scheme or the finding of the property scheme for the immovable.

Property-related assets

CIS 5A.8.6R
  1. (1)

    Property-related assets qualify for investment purposes (under CIS 5A.8.3 R (6)) only if:

    1. (a)

      they are transferable securities; and

    2. (b)

      they are shares in a body corporate at least 75% of whose total assets (before deduction of liabilities and as shown in the most recently published accounts) consist of permitted immovables.

  2. (2)

    Not more than 5% in the value of the scheme property of a property scheme is to consist of investments of the type referred to in (1) issued by any one issuer. The figure of 5% may be increased to 10% if:

    1. (a)

      the property scheme owns at least 90% of the rights to vote which are exercisable in all circumstances at general meetings of the body corporate;

    2. (b)

      the shares are or were bought within six months after receipt by the authorised fund manager of:

      1. (i)

        a report by an appropriate valuer relating to permitted immovables owned by the body corporate, indicating that they are transferable (as in CIS 5A.8.5 R (2)(a)) or have marriage value (as in CIS 5A.8.5 R (2)(b)); and

      2. (ii)

        a report, on the value of any assets other than permitted immovables, from a person then qualified to be an auditor of a company under the relevant legislation in any part of the United Kingdom;

    3. (c)

      at the time of the purchase it would not have been reasonably apparent to the authorised fund manager that the report at (b)(i) or (ii) could no longer reasonably be relied on; and

    4. (d)

      the shares were bought at no more than 105% of the total of the values in the reports at (b)(i) and (ii).

Investment in a collective investment scheme

CIS 5A.8.7R

Investments in units of a collective investment scheme must not be made unless that scheme:

  1. (1)

    is a regulated collective investment scheme which:

    1. (a)

      complies with section 243(10) of the Act (Authorisation orders: entitlement to have units redeemed) or is treated as complying with it by section 243(11) of the Act; and

    2. (b)

      is dedicated to approved immovables, with or without transferable securities which are property related assets or government and public securities; or

  2. (2)

    is a regulated collective investment scheme which is a money market scheme or a scheme of a category that is equivalent to a money market scheme.

Property related limits

CIS 5A.8.8R
  1. (1)

    Not more than 10% in value of the scheme property of a property scheme is to consist of approved immovables which are leasehold interests (or the equivalent: see CIS 5A.8.4 R (2)) having an unexpired term of less than 60 years.

  2. (2)

    Not more than 25% in value is to consist of approved immovables which are unoccupied and non-income producing or in course of substantial development, redevelopment or refurbishment.

Mortgaged property

CIS 5A.8.9R
  1. (1)

    Not more than 15% in value of that part of the scheme property of a property scheme which for the time being consists of immovables is to consist of mortgaged immovables.

  2. (2)

    An immovable subject to one or more mortgages may be retained by the property scheme only so long as the mortgage or each of the mortgages is an approved mortgage, the total sums outstanding under which do not exceed 50% of the value of the immovable (assuming for this purpose that the immovable is not mortgaged).

Spread

CIS 5A.8.10R
  1. (1)

    Not more than 15% in value of the scheme property of a property scheme is to consist of any one immovable.

  2. (2)

    In (1), immovables which would be regarded as having marriage value under CIS 5A.8.5 R (2)(b)must be regarded as one immovable.

  3. (3)

    The figure of 15% in (1) may be increased to 25% once the immovable has been included in the scheme property of a property scheme in compliance with (1).

  4. (4)

    Not more than 5% in value is to consist of property related assets issued (or conferring rights to investments issued) by any one issuer.

  5. (5)

    The figure of 5% in (4) may be increased to 10% in respect of up to 40% of the value of the scheme property of a property scheme.

  6. (6)

    Not more than 20% of the income receivable in any accounting period is to derive from members of any one group; but there is no restriction on the income receivable from any issuer of government and public securities.

Initial periods

CIS 5A.8.11R
  1. (1)

    During the period of the initial offer, no immovable may be:

    1. (a)

      bought or leased; or

    2. (b)

      agreed, by enforceable contract, to be bought or leased;

    unless it appears to the ACD or to the manager and trustee that more than £5 million (or the equivalent amount in the base currency of the property scheme) has been paid or agreed to be paid for units to be issued or sold.

  2. (2)

    During the first two years starting with the date on which the property scheme is authorised or on which the units are first issued (if later) and subject to (3) and (4):

    1. (a)

      CIS 5A.8.8 R (1)(Property related limits) and CIS 5A.8.10 R (Spread) do not apply; and

    2. (b)

      the obligation, derived from CIS 5A.8.3 R (Property schemes: general), that at least 20% in value of the scheme property must consist of approved immovables does not apply.

  3. (3)

    Paragraph (2) ceases to apply if, at any time during the two year period, six months have elapsed from the first date on which the scheme property exceeds £15 million in value (or the equivalent amount in the base currency of the property scheme).

  4. (4)

    Paragraph (2) postpones the application of CIS 5A.8.10 R (4)(Spread - (of property related assets)) for a maximum of only six months from the date on which the property scheme is authorised or on which the units are first issued (if later), and not of two years.

Grant of options and mortgages

CIS 5A.8.12R
  1. (1)

    No option may be granted to buy any immovable comprised in the scheme property, whether under CIS 5A.13 (Efficient portfolio management) or otherwise.

  2. (2)

    No mortgage other than an approved mortgage may be created on or over any such immovable.

CIS 5A.8.13G

Construction of property schemes

This table belongs to CIS 5A.8.2 G

Property Scheme A (fully invested in immovables)

Limits for Property scheme A

Type of Asset

Limits for Property Scheme B

Property scheme B (fully invested in transferable securities)

up to 10%

Leases 20-60 years

up to 10%

up to 25%

Vacant, repairs,...

up to 20%

80%

Immovables

up to 12%

Mortgaged immovables

up to 3%

Immovables

20%

up to 15%

any one immovable

up to 15%

up to 20%

rent from any one group

up to 20%

up to 20%

transferable securities which are property related assets (if approved)

up to 80%

0%

(if non approved)

up to 10%

20%

Transferable securities

up to 20%

Government and public securities

up to 35%

Transferable securities

80%

up to 5%

collective investment schemes

up to 5%

up to 5%

Any one issue of securities

up to 5%

Note 1:

This table does not include all the detail in this section (CIS 5A.8)

Note 2:

Property scheme A is invested in immovables to the maximum extent permitted, while Property scheme B is invested in immovables to the minimum extent permitted. Both property schemes are assumed to be fully invested in immovables and transferable securities, although in practice both would be likely to hold some cash as permitted by section CIS 5A.15 (Cash borrowing, lending and other provisions) and the cash held could therefore drive down to some lower figure the 20% minimum. The same effect would be produced if the property scheme were taking advantage of section CIS 5A.13 (Efficient portfolio management).