Commercial insurance article archive
Real Estate Investment Trusts - Are REITs the future for property investment?
Three years after they were first mentioned by the chancellor, investors were finally able to get to terms with Real Estate Investment Trusts (REITs) when they were launched at the start of the year, with analysts heralding them as a breakthrough for property investment.
"REITs are the hottest thing on the investment block," gushed This Is Money, while Charles Beer of KPMG proclaimed: "Investors at last have an opportunity to invest in commercial property via a listed company without significant tax disadvantages."
But do REITs really offer a new way to invest in property?
The short answer to that is no, as they were introduced to the US property market in the 1880s and are currently available in 18 other countries, but their belated introduction to the UK may offer some distinct benefits.
REITs have received close attention from property investors as they offer to cut out the risk and hassle inherent in actually buying and owning bricks and mortar, while also allowing the average investor access to areas of the property market, like shopping centres and offices, which are normally reserved for multi-millionaires.
Essentially a stock market for property, investors contribute to a pool of money managed by the trust.
In turn, the trust invests the collected assets in a number of properties, either commercial or residential, across the world and investors will share in the profits from rent, leasing and sales according to their level of investment.
In the past there have only been two options in entering the property investment game - you could buy a property in its entirety or buy the property in a limited partnership, but the major drawback with limited partnerships is that they are subject to high taxation.
Crucially for investors, REITs are exempt from paying corporation tax as long as at least 90 per cent of profits are paid out to shareholders. With the vast majority expected to keep to this limit, dividends are therefore predicted to be much higher than if an investor took out shares in a property firm.
The tax exemption may prove popular among investors as it removes the double-taxing of property which would normally see corporation tax paid by the company and then income or capital gains tax by the investor. There are also further tax tricks using REITs available for high-rate taxpayers, such as combining an investment in a REIT with a Isa, which can be exploited to gain further exemptions.
With such a package of potential high yields with minimised risks and tax exemptions, REITs have been winning over banks and building societies. Standard Life, Norwich Union and Halifax Bank of Scotland have all announced funds that will invest in REITs, although Norwich Union erred on the side of caution by electing to keep 20 per cent of investment aside in order to safeguard investors from possible failures.
But this is likely to be the first steps in the market with expansion expected by many analysts, including Doug Naismith, managing director of European Personal Investments for Fidelity International, who said: "As existing markets expand and REIT-like structures are introduced in more countries, we expect to see the overall market grow by some ten per cent per annum over the next five years, taking the market to $1 trillion by 2010."
In a speech at a National Association of Pension Funds conference last week he advised that REITs were the best way for pension funds to boost their coffers by investing in property as the small amount of risk offers high returns, while there was also a "huge range of investment choice".
However, despite the enthusiasm for the new investment vehicle, some market commentators have not joined in the chorus of acclaim.
Andrew Jackson, manager of Standard Life's REITs funds, said the introduction of UK REIT legislation has changed little for investors, except that property companies have now become more tax efficient.
Additional criticism came from fans of unit trusts and investment trusts, which have some similarities to REITs. According to the Telegraph, they would caution that REITs are more susceptible to the vagaries of the stock market since they are listed, which could result in poorer results in the event of a downturn.
However, some investors may view the flexibility of being able to buy and sell shares in REITs on the open market as being more of a boon than a hindrance, according to Steven Buller of Fidelity's Global Property fund.
"The cost and convenience of buying shares rather than bricks and mortar creates an accessible route into, and out of, property investments," he explained in a comment to Investment Week.
"One of the key advantages of property securities such as REITs is the greater level of liquidity they offer over investment into physical property."
Highlighting one main benefit of REITs in his view, Mr Buller added: "By investing in global property securities, investors can gain exposure to the more established REITs markets around the world.
"As the most local of assets, regional property markets show little correlation to each other. Therefore, having an exposure to a variety of international property markets through a global portfolio of these securities can show significantly less risk than many local real estate markets and still provide an attractive return."
As the market still adjusts to the introduction of REITs, there remain some qualms about its usefulness yet, aided no doubt be the openness and easy access to the trusts, investors have shown a keen willingness to test the waters with positive reactions from many. But whether the entire structure of the property market will be altered by the upstart investment vehicle remains to be seen.
22 Mar 2007