View more on these topics

Home and away

Property UK investors are increasingly looking overseas for property investments and the emergence of UK Reits will give them the benefits of a tax-advantaged wrapper and global diversification, says Alliance & Leicester head of intermediary mortgages Mehrdad Yousefi

Innovative ways of investing in overseas property are coming from all directions. What is the attraction and just how good an investment is property abroad?

Investors have a natural predisposition towards investing in their home country but an emerging trend is an increasing appetite to diversify abroad.

In the last Budget, the Chancellor announced that the UK was finally going to get a real estate investment trust structure.

A Reit combines the benefits of direct investment in commercial property with the advantages of transparency and liquidity associated with investing in a listed company, without the tax disadvantages that UK property companies currently face.

Quoted property companies have to pay corporation tax on the rental income generated by their investment portfolio but within a Reit structure the rental income is tax-free.

There are certain restrictions on Reits, mainly that 75 per cent of the income must be derived from the property and that at least 90 per cent of net income must be distributed to shareholders. Upon conversion, the property company has to pay 2 per cent of the current value of its assets to the Treasury, which is effectively a stamp duty of 2 per cent.

With their imminent introduction into the UK, Reits are a hot topic. Investors are turning their attention to global Reits for the benefits this asset class offers.

I believe that the case for investing in global Reits is strong. Reits have historically given very strong returns with moderate volatility and good liquidity. The global listed property market is experiencing dramatic growth which will improve liquidity still further in the coming years.

They also offer excellent diversification benefits. Global property markets move independently of each other, not only providing diversification within the asset class but a low correlation with other asset classes.

The recent performance of the sector has been strong and while returns look set to moderate, global Reit yields are expected to remain robust. This expectation is based on a combination of the sector’s high current dividend yield and an expectation of good net rental growth. Steady rental growth is expected in most retail markets and a strong rental recovery is expected in some Asian and European office markets.

The Japanese economy and public sector are expected to rebound after 14 years of deflation in land prices while Hong Kong and Singapore should benefit from rental recovery in offices and growth in China.

Taking two more examples from around the globe, Canadian office markets are strengthening on the back of expansion by natural resource companies and the German property investment market has seen significant demand following years of underperformance.

Demand for domestic asset classes continues to be strong but there are signs that investors are turning their attention across the Channel. There have been a number of recent fund launches giving investors access to general European property as well as specific property sectors. European property appears relatively attractively priced in the context of global property pricing.

What do European occupier markets look like at the moment? In line with the ongoing recovery in European economic activity, occupier markets are generally strengthening. Rents are stable to rising, with the greatest strength being in retail markets, and vacancy rates declining. Investors are still hungry and this is pushing yields lower, particularly in Central and Eastern European markets.

In the residential investment market, UK and Irish investors have so far led the surge of homebuyers into the new EU states, searching for bargains after house prices boomed in their respective countries.

Eastern markets are still cheap for many Western Europeans. Two-bedroom apartments in Chelsea rose by 12 per cent to 525,000 in the first half of this year compared with 78,000 for an average two-bedroom apartment in Budapest, according to local research firm GKI Gazdasagkutatu.

There are people who are buying the lifestyle – a home abroad that they can enjoy – or are investing for long-term capital growth. The whole overseas investment market has developed and matured rapidly across many European cities.

There is little doubt that private investor demand remains the driver of very strong returns from property and there is every reason to expect that the increasing appetite to diversify outside the home market will continue.

Recommended

Nationwide to bring in intermediary brands

Nationwide Building Society is likely to launch a multi-brand intermediary mortgage arm similar to HBOS and Royal Bank of Scotland after announcing its planned merger with Portman. The merger, which will be finalised in September 2007, will see the combined society, to be headed by Nationwide finance director Graham Beale, become the second-biggest mortgage lender […]

Carphone Warehouse fined 245k over insurance sales

The FSA has fined the Carphone Warehouse 245,000 for failing to inform the regulator in a timely manner of significant system failures surrounding sales of mobile phone insurance. The regulator says an investigation between January 14 and October 24, 2005 found that the Carphone Warehouse failed to send a statement of demands and needs to […]

Brown duels

Chancellor Gordon Brown has had an interesting couple of weeks. No doubt, a Channel 4 programme by Ros Altmann attacking his pension record has caused him irritation but it is perhaps not his main focus as he tries to secure the succession to the Premiership.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment