Since the Budget, just one big idea seems to have gripped the minds of those interested in financial services public policy – property investment funds.
Chancellor Gordon Brown announced the start of a consultation which looks like being inundated with respondents. This process, which was started by the Barker review into the supply of housing, offers a new opportunity for retail and institutional investors and looks set to be a major investment theme in coming months.
There appears to be a tremendous commonality of interest. In the past 18 months, I have acted for retail and institutional players in the core financial services and property markets who have been lobbying for such a change. It is very satisfying to see significant progress being made.
My phone has barely stopped ringing on the issue since the Chancellor sat down and the range of likely respondents has been extremely varied.
Fund manager Isis, mortgage lender GMAC-RFC, trade bodies such as the British Property Federation and the Pep and Isa Managers' Association, law firm Eversheds and accountant BDO Stoy Hayward have all expressed a public view.
The CML commented: 'The Barker review of housing supply heralds a major opportunity for lenders to engage with the Government on a broad range of issues.”
Most of these organisations view Pifs – as they have been termed in typical speed to create personal finance parlance indigestible for the customer – as a new opportunity. But before the industry gets too excited, we would do well to sit back and analyse policymakers' motivations for creating Pifs. If we do so, we are likely to create Pifs which both the Government and the industry would like to see as part of a concerted effort. There is now a long litany of Government objectives and financial products which do not seem to match each other.
It is worth spelling out the Treasury's intentions so as to achieve real dialogue between the industry and Government. The consultation paper, Promoting More Flexible Investment In Property, states that the proposals intend to “respond to concerns that barriers in the tax system may be contributing to distortions in the market for property investment, resulting in poor liquidity, barriers for smaller investors entering the market and high debt finance levels, all of which may be hindering progress towards a more stable market, better able to support the Government's economic objectives”. It is important also to consider what the Government wants to achieve out of those intentions. It has a number of broader policy objectives from the launch of Pifs, including:
To improve the quality of and quantity of finance for investment in commercial and residential property in a manner that promotes economic stability and market flexibility and helps to increase the supply of property.
To expand access to a wider range of savings products on a stable and well regulated basis and, therefore, promote long-term savings for individual investors.
To protect taxpayers by ensuring that a fair level of tax continues to be paid by the property sector and reduce opportunities for tax avoidance.
To support structural change in property markets to reduce costs and improve the quality and flexibility of commercial property to business users.
To improve efficiency, affordability and professionalism for residential tenants in the private rented sector.
It is the second core policy objective – expanding access to a wider range of savings products – which gives the financial services sector a major opportunity. The penultimate objective – supporting structural change in property markets – also provides lenders with an opportunity. The key thing will be to marry product ambitions and, therefore, language to these highly desirable policy outcomes.
The initial concepts for Pifs will please the closed-end fund industry as well as the tax planners. There is likely to be a requirement for a 90 per cent income distribution and a full distribution of capital gains.
There are a number of wider questions which the consultation is considering which will be of interest including:
What degree of retail investment should be permitted?
Should there be an open-ended option?
What kind of investment management – internal or external – should be permitted?
Should the minimum income distribution be 90 per cent?
What level of gearing should be permitted?
What wider investment restrictions should be in place?
Should there be a minimum holding period, as for VCTs?
There is much to think about and it seems that the Government is committed towards a realistic timescale of rolling out Pifs in 2006. As many providers have missed the boat on child trust funds – or do not wish to climb into it – it is highly encouraging to see such a range of interest.
What a joy it is also to hear the Government proclaim its desire to promote long-term savings. The Treasury seems to be very open to receiving a wide-ranging debate from the industry. The consultation period runs until July 16 and my earnest hope is that this consultation is a positive way forward for both the Government and the industry to start talking the same language at last.
Iain Anderson is a director and chief corporate counsel at Cicero Consulting