(REITS) Real estate investment trusts

Real estate investment trusts

The Chancellor announced finishing touches to his plan for real estate investment trusts, the specialist stock market vehicles for investing in property.


Are "REIT"s that special?
Their distinguishing marks are subtle. In a sense they will be a lot like investment trusts with a particular mandate to invest in property. As with investment trusts, their shares will be traded on the stock market and their capital will be fixed. They will have the potential to own a wide-ranging collection of properties, from shopping centres to offices. Their big attraction is that taxes will only be paid by the investor, not the fund itself.

What are the restrictions?
At least 90 per cent of a "REIT"s net profits must be passed on to shareholders as dividends, although there is no similar requirement on capital gains from sales. Taxable profits must cover the interest bill at least 1.25 times, which limits the amount they can borrow. Also, it is expected that no single investor will be allowed to own more than 10 per cent of the shares in a "REIT".

After some horse trading, the Treasury has decided to levy a conversion charge for the transfer of commercial property holdings into "REIT"s equivalent to 2 per cent of the gross market value of the investments. This move has pleased the property industry which was expecting the conversion charge would be levied as a percentage of unrealised capital gains.

Is this a pioneering step for the UK?
Hardly. As ever, the US led the way, launching the first "REITS" in the 1960s. They also now exist in Australia, Japan, France, Hong Kong, Singapore and Malaysia. The first Israeli "REIT" hit the market in January, the Indians are talking about them and Germany is racing the UK to be the next major country to launch "REITS".

Is there an alternative?
Almost anything investing in property is a potential rival. Big British quoted property companies like British Land and Land Securities allow investors to buy into diversified portfolios of properties. Both have said they will look at converting some of their activities to "REIT" structures.
Open-ended funds investing directly in property are mostly quite recent, but Britannic, Morley, New Star and SWIP all have unit trusts. The few onshore property investment trusts, like TR Property or Trust of Property Shares, have longer records, but invest mainly in other quoted property companies.
The existing funds most like "REITS" are offshore property trusts, including Standard Life Investments Property Income Trust or the £950 million F&C Commercial Property trust.

What has the performance been like?
Property has done very well for years. TR Property’s net asset value has grown by 233 per cent in five years, making it the fourth-best performing investment trust. The offshore funds typically offer yields - the dividend divided by the share price - of 4.5 per cent and their shares trade at a premium to the value of their assets. It is a similar story abroad. US "REITS" have shown compound annual returns, capital and income, of 14.5 per cent for the past 10 years, beating most share indices.

Will a REIT be able to invest in residential property?
When the latest plans were unveiled, there was an intention that "REITS" could provide an alternative investment to, say, buy-to-let properties. However, the main emphasis of "REITS" is initially likely to be the commercial sector.
Can I put a "REIT" into an individual savings account or self-invested personal pension?
The intention is that they should be able to be held in an ISA, a SIPP, a personal equity plan or a child trust fund.