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Property investing without the hassle By Jeff Salway
We all know Brits are passionate about property, and there are ways to invest in property without having to deal with tenants. Since 1 January, there has been a new kid on the property investment block, with the UK So what are they? Investing in a REIT is essentially the same as investing in any company that is listed on the stock exchange, but in this case you are buying shares in a company that owns and manages income-producing property. "A REIT is basically a property company that is complying with special legislative tax structures," Fidelity International product specialist Alex Tarver explains. Companies like British Land (BLND) and Land Securities (LAND) that converted to this new structure at the start of the year generally manage commercial properties such as retail, office or industrial buildings. They can also invest in residential property, but this is currently limited. "What has happened here is a company that has converted to REIT status, like British Land or Land Securities, has just changed its tax status. They haven't changed their business model," Tarver says. What sets a REIT apart from other forms of collective property investment, such as property unit trusts and property companies, is its tax status. To qualify as a REIT, a company has to distribute at least 90% of the rental income it brings in to shareholders as dividends. In return, the REIT does not have to pay corporation tax on rental income or capital gains tax on properties sold within the portfolio. So, theoretically, it should mean more paid out in dividends to investors. Many similar investment vehicles are often taxed twice: the investment vehicle and the investor are taxed, creating a double whammy. ING UK Real Estate Income Trust (IRET) fund manager Elliot Caldwell says: "For the first time we've got parity between direct investment in property and indirect through a listed vehicle with no tax disadvantage. Now we've got a level playing field." An added bonus of REITs is that they are cost-effective and can be accessed through wrappers like individual savings accounts (ISAs), personal pensions and child trust funds to help make them even more tax-efficient. Other advantages Because a REIT is effectively an equity or share, you can buy or sell it much more easily than buying or selling a whole physical property or a unit in a property fund. "Compared to a property fund, you've got liquidity - you can sell when you need to," says Hargreaves Lansdown investment manager Ben Yearsley. "With a property fund you could get locked in if there is a run of investment in the fund." Like all forms of property investment, REITs offer useful diversification within an investment portfolio, as property will generally act in a different way to the stockmarket. So if equities are having a tough time, then having exposure to property can help to balance this out. Caldwell adds, "History has shown that property has a very powerful case in terms of smoothing returns." Furthermore, buying into a collective property investment like a REIT gives you an investment in a range of properties of different types and in different locations, whereas on your own you might struggle to buy just one. It also provides investors with an opportunity to invest in commercial property. The flip side But UK REITs are not necessarily the magical panacea for all of your property investment needs. As Yearsley points out, REITs may not give you any greater diversification than a property unit trust would. "If it's a UK-based (REIT) you'll have no difference at all," he says. "What you can do is buy a REIT fund - a unit trust that invests in REITs around the world - that will give you diversification benefits." Jason Evans, a partner at Bristol-based IFA Kohn Cougar, adds that while REITs can be a good diversifier, he believes they are not as good as a true 'bricks and mortar' investment, as REITs will be more affected by what is happening on the stockmarket. "A lot of people say property isn't highly correlated to equities - with bricks-and-mortar property funds I would agree with that. But if it's a property investment trust or REIT, they will have more correlation with equities than property unit trusts," Evans says. Yearsley agrees: "If stockmarkets suddenly took a pounding, a REIT will go down in value - not as much as the rest of equities, but it will still go down." Even though tax-efficiency is one reason you might want to invest in a UK REIT, there is a downside to this as well. Dividends from non-REIT shares are generally taxed at 10% for UK individuals on the basic tax rate and 32.5% for those on the higher rate. But for REITs, those rates are 22% and 40% respectively, because this is classed as property-letting income. Another issue is the yields - the rental income on your money - in the commercial property market. According to Evans, yields in some sectors of the market are currently below that of a government bond, which is considered a virtually risk-free investment. This could be compensated for by an increase in the capital value of your property. If you fancy dipping your toe into the REITs market, it's fairly simple to do so, but it's recommended that you speak to an independent financial adviser first. Directly buying shares in a REIT does not incur any initial fees or an annual management charge, but you will have to pay the usual share-dealing costs and stamp duty of 0.5%. Although REITs have attracted plenty of attention since their launch, the experts suggest the UK REIT scene is likely to gather pace gradually. To date, nine property companies have converted to UK REIT status with investment of £33.4 billlion. Meanwhile, the total value of property inside UK REITs is £49.5 billion. However, Caldwell predicts the first new REIT, as opposed to a conversion, will probably launch in the UK this year. The Association of Investment Companies (AIC) sees a similar picture. The more traditional 'closed ended' offshore property investment company sector offer greater flexibility. "There is already a thriving market for closed ended property funds based offshore and with the sector up 18% in 2006, it's a tried and tested model," Jackson says.
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