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The estate of things

Gregor Watt sums up the first couple of months of the Reit regime and finds some brokers sceptical of the new investment class but also welcoming the opportunity to invest in overseas property

The initial excitement surrounding the launch of real estate investment trusts has now subsided and with no new fund launches, after the initial flurry of conversions on January 1, there has so far not been much to attract the retail investor.

The reasons for investing in the big property companies such as British Land and Land Securities have not changed since the end of last year and without new and innovative fund launches, advisers are struggling to find a good reason to invest in Reits.

The sticking point seems to be that Reits fall between two different asset classes – property and equities.

With the IPD Property index showing returns of 18.3 per cent and 19.1 per cent in 2004 and 2005 respectively, it is no surprise that property has been among the most popular asset class in the last year.

Similarly, investors are familiar equities and whether they are investing for growth or income investors are happy to buy into the equity markets. Almost 16bn was invested in the last three months of last year alone.

However, advisers seem unsure who should be investing in a property investment that behaves like equities.

Hargreaves Lansdown investment manager Ben Yearsley says in the long run, Reits will not offer more in terms of returns than traditional property unit trusts. Reits will be more closely correlated to equities so they will have more volatility and will perform at different stages in the market.

He says: “Ultimately, the underlying performance, over the long term will probably balance out. You are not going to get anything you have not already got.”

Bestinvest director of communications Justin Modray agrees and says that to move an allocation from a traditional property unit trust into a Reit would probably not be in a client’s best interestModray says: “For most investors, to move everything suddenly to Reits does not make sense.” Such a move, he says, would mean giving up the lack of correlation to other investment markets and relative stability that property has traditionally offered.

Zen Financial IFA Mike Pendergast says a Reit is a hybrid of equity and property and he would struggle to recommend them as an investment. He believes investors would be better sticking to a property fund that has a mixture of bricks and mortar and quoted investments.

He says: “We would not recommend clients to invest directly. They are too risky for the type of client we are looking at.”

Pendergast says Reits may be more suitable for high-net-worth clients who can afford to take on the risk but for the average client, someone in retirement with 100,000 to 200,000 to invest, Reits are probably not appropriate.

Dave Butler, programme co-ordinator at Reita, says over the short term, Reits do behave more like equities than property but you should not be looking at equities or property as an investment over the short term.

He says: “If you look at quoted property company shares or Reits over the longer term, five to 10 years, they perform much more like the underlying property assets than equities.

Butler says investors should consider whether they want to be invested in property and then decide how they want the exposure. He says: “You should be asking, where should property sit within your asset allocation and then, what s your attitude to risk?”

If you do not want to accept the slightly higher risk or are not happy selecting a Reit, then Butler says you may be better off choosing a property fund but you will miss out on the benefits of investing though a Reit.

He says: “You will lose, in that case, some of the benefits of liquidity that Reits offer. There is also a steady income stream. They don’t pay huge dividends but the average property company pays 2 to 2.5 per cent in income and this increases to 3 per cent on conversion.”

He also argues that the biggest Reits offer all the benefits that attract people to property funds.

Butler says: “Some of the bigger Reits, such as British Land and Land Securities, have as much as 10bn of assets and they give the same sort of diversity in real bricks and mortar investment that property funds offer.”

If the market follows the examples of the Australian, American or even the French markets, then in time there may be enough new funds in specialist areas to make a convincing case for Reit investment but in the meantime there is one area where Reits do offer investors additional choice – overseas property.

Modray says: “Where I think Reits are useful for the UK investor is global Reit funds. The UK property market is slowing down. If you like property as an asset class, then you would obviously be looking overseas. It is difficult to invest directly in property overseas.”

Yearsley agrees and says that although there are one or two new property funds coming on to the market, such as the New Star international property fund and a new Norwich Union European property fund, Reits do offer retail investors the best access to overseas property.

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