New Star is warning advisers and investors that yields on real estate investment trusts could be nowhere near as high as many are anticipating.
Research by the fund manager found that estimated yield returns from listed property firms post-Reit conversion came in at between 2.6 and 3.5 per cent, with most towards the lower end of this projection.
Estimated yields from the two biggest UK-listed property firms, British Land and Land Securities, was even lower. New Star says at its current share price of 1625p, British Land is likely to pay a gross yield of around 2 per cent before tax while Land Securities will yield around 2.2 per cent at its current price of 2198p.
Land Securities, along with rival property companies Slough Estates and Brixton, has already warned the market not to expect big yield increases when they convert.
New Star property trust co-manager Marcus Langlands Pearse says he welcomes Reits as their introduction increases the focus on property but he does not see them as a major competitor to bricks and mortar funds as they are less of a diversifier, being listed and subject to market movements.
He says: “Many investors realise that all Reits are is property companies with a tax break and do not expect them to behave like totally different animals. The reason property became the third asset class was to diversify to avoid volatility so they will not get this by investing in Reits.
“A lot of IFAs are recommending between 10 and 20 per cent returns from the property sector but investors could be disappointed if they expect yields that high from Reits. We expect most companies to yield between 2.6 and 3.5 per cent, with most towards the lower level.”