Taking Account
  • Taking Account

REITS - The new kid on the property block

Money Wise spring 2007

Commercial property has become a popular sector for investment in recent times, helped by the double digit returns achieved over each of the last four calendar years . (according to Investment Property Databank February 2006)

Property is a specialist investment that may be subject to limited liquidity. The value of property is a matter of the valuer’s opinion rather than fact. Past performance is not a guide to the future and the value of investments and the income from them can go down as well as up.

The start of the year marked the launch of the UK’s first real estate investment trusts (REITs). The main benefit of REITs is that they give investors a new tax-efficient indirect route to investment in property — residential or commercial. Some of the UK’s major listed property companies have converted to REITs to take advantage of the new tax rules.

However, if you are thinking of investing in, or adding to, existing holdings in commercial property, REITs may not be the ideal option:

  • The tax-efficiency is mainly beneficial to non-taxpayers, such as pension funds and ISA/PEP investors. For tax paying investors, the benefit is small: the tax treatment is basically the same as if you were a direct property owner.
  • The choice of REITs is likely to be limited mainly to former property companies—at least to start with. The REIT rules have made conversion relatively easy, but launching a completely new trust more difficult.
  • REITs are not priced in the same way as authorised property funds. REIT share prices are set by the stockmarket, whereas property fund prices are based on the value of the underlying property. Experience in the United States shows that REIT share prices are much more volatile than the underlying property values.
  • The income yields from the converted property companies look set to be low — these will not be high income investments. Forexample, based on a share price of around £16, British Land has suggested it will give a gross yield of 2.1%.

For many investors, existing property funds may therefore be a better option than REITs.

Hilton Sharp & Clarke