Transparency in the real estate sector: is it worth it?
The last few years have seen the development of several new initiatives designed to increase transparency in the real estate sector.
In this briefing, we explain what these are, why they are being pursued and whether the benefits justify the extra compliance burden for business.
Increased transparency is being pursued in the real estate sector because it is hoped that more information will:
In some instances, increased availability of data may also boost emerging sectors such as PropTech (see further section 5), by opening the way to develop and market new digital tools for market participants.
Below we outline three real estate transparency initiatives which are largely driven by these policy objectives, namely:
However, increased transparency can come at a cost – which in this case is largely being borne by business. In section 5, we look at whether the claimed benefits of increased transparency justify this cost and whether there is more that Government could do to help deliver those benefits.
The overseas entities regime was introduced into law via the Economic Crime (Transparency and Enforcement) Act 2022 (the "Act") in March 2022. The key measure in the Act was the requirement for overseas entities that already own qualifying land in the UK, or that plan to do so, to apply for registration in the register of overseas entities (the "Register"). Our previous briefing contains more information about the Register and the new regime.
From 31 January 2023:
A number of overseas entities that own qualifying land in the UK have not yet applied to the Register and others have made applications but have not adequately responded to requisitions by Companies House. It is not yet clear to what extent overseas entities will attempt to sidestep the regime by either declining to apply or supplying false or incomplete information, although they may be subject to financial and criminal penalties if they do so. Although there are no penalties in the Act for UK entities entering into transactions with non-compliant overseas entities, they may be impacted by restrictions on the overseas entity's ability to register its transactions at HM Land Registry. Even if the transaction does not give rise to registration requirements, UK entities are increasingly wary of doing so and many contracts now contain clauses to the effect that a UK entity is entitled to decline to complete a transaction without sight of the overseas entities ID that will be issued to their overseas counterparty by the Register upon registration.
A similar beneficial ownership disclosure regime put in place by the EU has recently been challenged on data protection grounds. The Court of Justice (CJEU) ruled that the regime went further than was justified in making individual beneficial owners' names available to the public. Transparency campaigners, however, argue that the CJEU ruling amounts to a retrograde step and that only a register which is fully open to the public, particularly investigative journalists, can hope to achieve its aims of preventing and deterring money-laundering and other illicit activity. In the UK, the Government has confirmed that it does not intend to the follow the CJEU's approach and takes the view that in this area, transparency trumps privacy – but the CJEU ruling highlights the potential for conflict between these two areas of regulation.
Part 9 of the Levelling Up and Regeneration Bill, which is currently wending its way through Parliament, contains provisions for the introduction of a system to increase transparency of contractual arrangements used to exercise control over the buying or selling of land.
The Government will have the power to collect and publish data on these arrangements to:
The Government will also have the power to collect additional real-time ownership, funding and transaction data, enabling a fuller understanding of who owns and controls land and property in England and Wales. This follows a 2020 consultation: "Transparency and competition: a call for evidence on data on land control".
There has not been much publicity around this measure, but several responses to the consultation suggested that there is a level of concern about whether the extent of the public interest in the commercial data that will be revealed by this register is sufficient to justify the potential harm it may cause to legitimate businesses.
The TRS is a register of the beneficial ownership of trusts and is managed by HMRC. It contains information about each registered trust and the people connected to it, including settlors, trustees and beneficiaries. As an overview, the extension is broadly to include non-taxable trusts that are:
However, there are various exemptions including trusts created for the purpose of enabling or facilitating a transaction effected for genuine commercial reasons. Further information can be found in HMRC's Trust Registration Service Manual here.
Relevant non-taxable trusts in existence on 6 October 2020 and any created before 1 September 2022 were required to be registered by 1 September 2022. Trusts created on or after 2 June 2022 must register within 90 days of their creation. Registration will also be triggered when a non-UK trust acquires UK real estate.
As the rules are complex, it is not yet known whether there has been full compliance with the new regime and whether it has in fact achieved its stated aim of helping combat money laundering and terrorist financing in the UK.
Where these new regimes have already been introduced, they have added to the compliance and regulatory burden of businesses in the real estate sector and beyond. There is, however, a perception in some quarters that UK real estate has become tainted by money-laundering in particular, and the industry has therefore been keen to embrace these changes in order to clean up the sector's image; as a result, there has been limited pushback against the extra costs involved with the overseas entities regime and the TRS.
However, the contractual controls register, which is not yet in force, may prove more controversial – especially as many of the benefits claimed require Government to make effective use of the resulting data in order to achieve better outcomes. If Government fails to deliver, market participants may be more inclined to question whether the increased cost and compliance burden is worth it.
The wider context of this new register includes the announcement in February that the CMA launched a market study into housebuilding in England, Scotland and Wales, looking at how the market is structured in order to establish whether there is market distortions in the supply of new homes and whether these distortions harm consumers.
Businesses may also question why, given the Government's own statements about the benefits of transparency, it is not doing more to promote greater access to its own data. For example, the 2020 consultation on the contractual controls register suggests that the data collected would assist the "PropTech" sector in creating new tools. Such businesses would probably also benefit from greater access to a range of other data held by Government and local authorities – yet it is not always easy for the private sector to obtain such access. In particular, unless Government has chosen to make data available (e.g. through its open data initiative), there is often little that the private sector can do in order to push for access to be granted, even where it can point to significant wider benefits. For example, existing legislation (such as the Freedom of Information Act 2000 or the Re-Use of Public Sector Information Regulations 2015) is generally ill-suited to obtaining access to up-to-date and comprehensive data feeds which would be needed to support new digital tools. Whilst the EU has made some moves to legislate in support of increased access to data of this type through its Data Governance Act, the UK has yet to indicate whether it plans to follow a similar approach.
Finally, turning to the bigger picture, these initiatives illustrate how the Government's emphasis on removing red tape can often be misleading. For example, in many areas, as here, the Government is introducing more regulation, not less – but it is typically doing so with the aim of delivering economic and social benefits, such as those outlined in section 1 above, which it views as outweighing the costs to business.
In that respect, the issues are similar to those that we discussed in our recent briefing about introducing tougher enforcement powers for the UK's competition regulator; whilst these measures are likely to impose some additional burdens on business, they can also be expected to sharpen competition and drive growth.
This is the fifth in a series of briefings on regulatory reform across a range of different sectors, entitled Spotlight on Better Regulation. So far, we have discussed:
You can also use our Regulatory Reform portal to check for the latest updates on changes to regulation across all areas on which we advise.
