April 2007
NEW STYLE PROPERTY TRUSTS - THE ALTERNATIVE WAY TO INVEST IN PROPERTY
Bill Saunders, head of financial planning at Acumen Financial Planning, looks at the recent introduction of Real Estate Investment Trusts into the UK, and assesses its attractiveness to investors:
We are all aware of how popular an investment property has become in recent years. Now there is an alternative way of accessing property as part of your portfolio.
A Real Estate Investment Trust (REIT - pronounced "reet") is a company quoted on the stock market that owns and manages income producing property, which could be either commercial or residential. Most of its taxable income (at least 90%) is distributed to shareholders through dividends, in return for which the company is largely exempt from corporation tax.
REITs are designed to offer investors income and capital appreciation from rented property assets in a tax-efficient way. This is achieved by taking away the 'double taxation' (corporation tax plus the tax on dividends) of ordinary property funds.
The introduction of UK REITs creates an opportunity for a wide range of investors to invest in property as an asset class by creating a more liquid and tax-efficient vehicle. Here in the UK, the Government first announced its intention to launch REITs back in 1997 and the long awaited introduction of the UK REIT finally occurred on 1 January 2007.
The introduction of UK REITs is partly about aligning the UK with other key markets that already have a bespoke property investment vehicle - including the US, Australia, Belgium, Canada, Singapore, Japan and France.
At the heart of the new policy is the creation of an investment vehicle that allows UK investors to access property returns without tax being a factor. It is also about encouraging investments that are potentially more secure than residential buy-to-let, through increased liquidity and diversification, and enabling private investors to share in the same attractive returns from commercial property that are arguably only available to bigger investors.
The Government also hopes to entice retail investors into commercial property funds like REITs through tax-sheltered personal finance wrappers like ISAs and SIPPs.
One of the drawbacks of direct property investment is that it lacks liquidity. UK REITs get around this by enabling investors to buy and sell easily traded shares.
The introduction of REITs opens up new opportunities for small investors in the UK, where access to property investments has always been limited. Most significantly it allows individual investors to invest indirectly in a diversified property portfolio, buying low cost and easily tradable shares instead of having to finance the purchase of whole properties. Because UK REITs pay out such a large portion (90%) of their profits in dividends, they're also particularly attractive to income-seeking investors.
Before investing in REITs you need to be sure the investment is right for you. You should speak to a suitably qualified financial planner to consider how REITs might fit within your investment portfolio. As everyone's personal circumstances and risk outlook varies, it's critical that you fully understand all the risks involved before deciding whether REITs could be right for you.
