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Making the reit move

Despite a fanfare launch last year, real estate invest-ment trusts have yet to capture the imagin-ation of either investorsor advisers.

The timing of their intro-duction could not have been worse, with the commercial property market last year suffering its first drop since 1992. The average Reit fellby 35 per cent in 2007, way overshooting the 5.7 per cent fall in the IPD index as hype regarding the new regime gave way to panic overthe direction of the commercial property market.

Towry Law certified financial planner Patrick Connolly says this underlines why Reits are not the most efficient way to access property. “We are not intending to use them because we use property as a diversifier and Reits tend to move more in line with the market,” he says.

But perhaps as disappointing as their early performance is the lack of new products. There are now18 Reits in the UK but only two are newly launched specialist products. The others are existing property companies that converted.

One of the Government’s stated aims when introducing Reits was to providea broad and diverse invest-able property sector.

In the US there are around 200 Reits, enabling investors to access a whole rangeof niche property typesas diverse as car showrooms and prisons.

“It is very disappointing,” says Dave Butler, head of external affairs at Reita.”To make the market interesting, we need nearer to 30 Reits.”

He believes most private investors will access Reits through collective investments but there arecurrently too few for fundsof Reits to be viable.

Phil Nicklin, a partner at Deloitte, says a number of further launches are in the pipeline but the market climate is resulting in property companies postponing any launchor conversion plans.

“We know a number of companies are keen to launch but potential entrants are holding off until the credit crunch eases,” he says.

Land Securities, the £7.4bn giant of the sector, recently signalled its intention to break up the business and provide more focused Reits.

This will see the company split into a pure UK retail Reit and a London Reit that holds both retail and offices. The firm’s property management arm, Trillium, will also be spun out as part of the deal.

The two Reits coming out of Land Securities will both have around £7bn of assetsbut the company says the deal is unlikely to go ahead for at least 12 months.

Issues of scale that do not apply in the US could hold back the development ofthe UK market.

Butler concedes that getting smaller specialist property companies to convert is difficult. He says realistically the minimum portfolio size for a Reit is £100m as listing will cost around 4 per cent of the value of the assets raised.

The two newly launched specialist Reits focus on healthcare facilities and neighbourhood shopping arcades. Primary Healthcare Properties has a market cap of £107m and Local Shopping Reit £98.5m.

PHP managing director Harry Hyman regards the launch of Reits as a success. “The underlying movement of the property market should not be confused with the success of Reits,” he says.”We now appeal to a much wider range of investorsand feel we have a tax advantage compared with other property companies.”

Butler echoes this sentiment, stressing that Reits are a long-term Government objective and vital to ensuring that the UK can attract investment into property from overseas.

Twenty-three countries now have Reits, with Pakistan the latest to introduce them.

“The first goal was to get the legislation in place and the next stage is to get more companies to convert and come into public ownership,” Butler adds. Another key step in the development of the Reit market will be the launchof residential Reits.

Nicklin, who leads the Treasury’s Reit group, says the Government is keen on the idea but the current legislation needs tweakingto iron out some technical issues, such as responsibility for rent collection.

Lehman Brothers head of European real estate Edmund Craston points to the discrepancy between the size of the residential property market and the amount that is investable. The residential market is worth £4trillion but only £300bn is investable, mainly held by buy-to-let investors and housing associations.

By way of comparison, the commercial property market is worth £700bn and £400bn of that is investable.

Craston says: “It is much more rational for individuals to invest in a residential property Reit. However, one of the problems in getting institutions interestedis assembling portfoliosof sufficient size.”

There are also concerns about the direction of residential property prices and whether a correction is imminent, adds Craston.

As for the outlook forthe existing Reit sector, Henderson head of property equities Patrick Sumnersays that he expects to see further falls before a modest recovery in the second halfof the year.

He says the discount on companies’ net asset values will narrow from the 27 per cent current average to about 22 per cent by the year-end, but NAV growth will be flat.

“I think we will see greater stability after March with the market bottoming mid-year and then moderate growthin the second half ofthe year,” says Sumner.

If he is right, then the Reit market should be more interesting and diversein a year’s time.


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