|
| Personal finance articles |
|
|
|
Property investment that keeps its value
By Gail Moss
When the real estate investment trust (REIT) sector celebrated its first anniversary in January, it probably wasn't in the party spirit. With the commercial property market on a slippery slope, it's been a tough ride for REITs.
But it's not all gloom and doom - despite some fall in market value, REITs continue to offer better value than the actual property held in them, according to some industry experts.
REITs were first introduced in the US in the 1960s, and now exist in a number of countries, including France, Australia and Germany. They were launched in the UK on 1 January 2007.
The name itself is an American hangover - in the UK REITs are essentially closed-ended listed property companies whose main activity is to own a portfolio of buildings which are then let out to generate rental income. These companies also enjoy certain tax advantages.
Several established names in the property world, such as British Land, Land Securities and Hammerson, have converted to REITs, along with up-and-coming enterprises such as Big Yellow, the self-storage company.
Previously, UK-listed property companies had to pay corporation tax on their profits, while investors had to pay income tax on their dividends and capital gains tax on increases in share values. Investors who bought bricks and mortar direct, on the other hand, only paid one tax charge, on their rental income. So the REIT structure was introduced to create a more level playing field.
Property companies converting to - or launching as - REITs are largely exempt from corporation tax, in return for complying with a number of rules. One of the most important of these is that at least 90% of the company's taxable income has to be distributed to shareholders through dividends. Another is that at least 75% of its assets have to be buildings which generate rental income. Incentive for big dividends"REITs can work well as an additional source of income, and the yield transparency is terrific," says Jon Horton, a financial planner for independent financial advisers Chamberlain de Broe. "Also, the tax regime gives companies an incentive to pay big dividends."
There are currently 18 REITs on the UK market, ranging in size from the £35 million Rugby Estates to the£7.2 billion Land Securities, both of which run diversified portfolios.
While a handful of REITs invest across the whole commercial property spectrum, most specialise in one specific sector. Great Portland Estates invests in offices, for example, while Liberty International is the biggest dedicated investor in retail. Others specialise in industrial premises, and Primary Health Properties owns medical and dental surgeries. REITs can also invest in residential property, although this has yet to take off.
Of course, you can invest in property in other ways. You can acquire your own buy-to-let properties, for example. But this means a greater initial capital outlay, plus the additional cost and effort of managing the properties yourself. Also, because property is an illiquid asset, it's more difficult to dispose of.
Alternatively, you could look at shares in those property companies which have not converted to REITs - often because they do not comply with the requirement to generate rental income. These companies may not offer yields as high as REITs, but could have more potential for capital growth, as they are more likely to be involved in buying land, developing it and then selling it on.
Elsewhere, if you are a small investor, property funds are a practical option. Property unit trusts allow access to a diversified portfolio of commercial properties and the possibility of income, as well as capital appreciation. Unfortunately, the slump in property prices means that several funds have imposed a six-month wait for investors wishing to redeem their units."Vulnerable to collapse"Property investment trusts run similar property portfolios but are closed-ended, meaning their shares can always be traded. But the share price is more vulnerable to collapse if the trust is doing badly.
"Many property investment trusts pay significantly higher yields," says Horton. "Investors can currently get 8% to 10% from the shares. However, the sector is trading at an average discount to net asset value of 29%." The larger the discount, the greater the potential for long-term capital growth, but a large discount could also reflect problems in the company.
So, should investors seeking some property market exposure go into REITs just now?
The property market is currently experiencing a downturn, and this has been exacerbated by the volatility of the UK stockmarket. Also, if there is a full-blown recession in the UK, this would affect tenant demand for properties, and therefore REITs' income.
However, Dave Butler, head of external affairs for the Real Estate Investment Trust Association, is fairly sanguine about the market's prospects. "In the UK, yields from REITs have been running at 2.5% to 3%, but they're now starting to move up to 3.5%. If you want predictable income over the long term, they make a lot of sense," he says.
But property should not be seen as a short-term investment, and the share price reflects this. Since their launch last year (after the property market boom), REITs have seen a drop of 40% or more in their share price. This was partly because of the fact that many investors bought property company shares in anticipation of the REITs legislation, then sold them when the companies converted to REITs.
Even so, much of the slump has been caused by the current commercial property market malaise. Since January 2007, UK property equities (represented by the European Public Real Estate Association's UK index) have fallen to about 65% of the value of UK equities (represented by the FTSE 350).
However, the most recent figures from the IPD research organisation suggest that the commercial property slump might be about to turn round - the rate of decline in capital values has halved from the December figure of -4.2% to -2%, and there is a positive income return of 0.5%.
"The UK is looking cheap right now, and there's significant interest from international investors," says Butler. "Share prices will stabilise with more long-term investors coming in."
Useful links:
|
Send Article by Email
Send Article by IM
Blog This with Y! 360
Printable View