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Halfway houses

Reits are ready to go in January with property companies lining up to convert but, asks Gregor Watt, can the initial momentum continue??

The final pieces of regulation and guidance on Reits are now in place.

The Government first set out its aims for this taxefficient form of property investment back in 2004, intending to bring UK property investment funds into line with other countries and tackling wider issues.

It was originally hoped that Reits would create an effective vehicle for collective investment in residential property to boost the supply of affordable housing and take some of the heat out of the buy-to-let market.

Some of these aims have taken a back seat but with just over a month to go until their launch in January 2007, property companies and funds now know all they need to decide whether to convert or not.

British Property Federation director of finance and investment Gareth Lewis says the only issue that funds were waiting for clarification on was the tax status for people or organisations that owned more than 10 per cent of the shares in a Reit but this has now been cleared up.

Nabarro Nathanson partner in the UK Reit team Chris Luck says: “People know enough to make the conversion decision.”

A number of funds and companies have already taken the decision to convert and Lewis says between 10 and 15 of the 29 property companies and managers that have signed up Reita, the organisation that represents Reits and quoted property investments, have confirmed their intention to convert to Reit status in January.

ING Real Estate Investment Management fund manager Elliot Caldwell says there is a simple cash advantage for existing property investment companies and this is behind the high levels of interest.

“Property companies have a contingent tax liability which they can write off for a 2 per cent conversion charge. It makes a lot of sense for them to convert at this discounted rate,” says Caldwell.

Reits also end the existing problem of double taxation.

Luck says: “For an investment in an existing property fund, the investor gets taxed at dividend level but the company that owns the underlying investment also gets taxed in the middle. Reits remove that problem.”

But it is still is unclear how Reits will tackle the residential market and after the initial rush, there may not be many new ventures.

Lewis says: “We have concerns about the Reit market being able to grow organically.”

With companies the size of British Land confirming their intention to convert as early as possible, property investors will not be short of opportunities initially.

What are the advantages of Reits for individual investors?

Informed Choice director Martin Bamford says one of the advantages is increased tradeability. Shares in a Reit will be listed and traded on the Stock Exchange and will have none of the exit restrictions that property unit trusts can impose.

“They are going to be more liquid and it will be easier to move in and out of these investments,” says Bamford.

Axa Real Estate Investment Management head of busi-ness development and marketing Anthony Shayle agrees that Reits will improve liquidity and says if the UK market follows the examples of Australia and the US, where they have had Reits for some time, they will also increase the choice of investments available.

Shayle says: “They are, by and large, a sector-specific product. If you have a variety of different Reit products for different sectors, it broadens the choice available.”

Reits could be useful for people seeking income. One of the requirements of Reits, brought in to stop companies turning the changed tax status into bigger profits, is that they have to distribute 90 per cent of their revenue as dividends.

Caldwell says that Reits will work as a high-income option but, with restrictions on the amount of development property that any Reit can hold and a move to safeguard income by using longer leases,they could sacrifice growth.

He says: “If you choose a high-income fund, you are going to get lower capital growth.”

Another possible downside is that as Reits are listed on the stock exchange, they could pick up some of the volatility of equities.

Caldwell says volatility will increase but in the long term it will be minimal.”

Citing the examples of existing markets he says: “In the short term, it appears that Reits are a halfway house between equity and traditional property investments.”


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