UK property circles abuzz with talk of Reits

Real estate investment trusts (Reits) could be the next big thing forproperty investors in the UK and Ireland. Gretchen Friemann reports

One of the greatest bugbears for investors in institutional property funds is the lack of transparency and illiquidity compared to other asset classes.

But analysts and property experts believe this could change if the Government follows the UK move to introduce tax-efficient property funds aimed at increasing market liquidity and boosting capital flows into house building.

Alongside his annual budget last month, the British Chancellor of the Exchequer, Mr Gordon Brown, issued a consultation paper on the possible structure of new tax-exempt property investment funds (PIFs, generally referred to in the US and Australia as real estate investment trusts or Reits).

Reit-type structures are also available in France and the Netherlands but the big markets are the US and Australia, where they amount to 6 per cent of the All Ordinaries share index.

These investment vehicles, usually traded on a stock exchange, pay no corporate income tax and zero capital gains tax in return for redistributing most of their income to investors, where most of the tax liability occurs.

The advantage to Reits' owners is the erosion of the discount on the property vehicle's underlying net asset value (NAV). Currently, market illiquidity and high transaction costs means British property shares trade at a discount range of between 20 and 40 per cent on NAV.

However, the hype over the release of the British government's PIF consultation paper sparked a run on property shares in the months leading up to budget day as the market priced in a narrowing in the NAV discount and it now sits at just under 20 per cent.

Essentially, a Reit is a company that owns and, in most cases, operates income producing real estate, such as apartments, shopping centres, offices, hotels and warehouses. To qualify as a Reit, a company must redistribute a high proportion - in the US at least 90 per cent - of its taxable income to its shareholders annually.

When the US congress introduced Reits in 1960 the idea was to make large-scale commercial property investing more accessible to the small investor.

While Mr Brown's paper has not entirely convinced the property market in the UK because of its overly prescriptive tone, analysts there expect Reits to be introduced by spring next year. If that's the case, Irish property experts believe legislation here for the similar tax-efficient schemes could follow.

A property expert in one of the large stockbrokerage houses, who preferred to remain anonymous, said the likelihood of Reits being introduced in the Irish market once it hits the UK is "very high".

He said: "I think the Irish Government probably will introduce Reits here but there is a big question mark over whether the market here is deep enough. We're talking about two hypotheticals here. It's not just a case of whether the Irish Government will bring in new legislation, it's also a question of whether a property fund here will convert into a Reit-type structure and float on the stock exchange."

The delistment of Green Property in 2002 stripped the ISEQ of property shares. Its decision to go private is understood to be a result of the unfavourable NAV discount.

Mr Roderick Downer, director of Colliers Jackson Stops and a member of Colliers International European Board, said the Reits consultation paper had set the market abuzz in the UK. "It's all anyone seems to be talking about over there at the moment," he said. I believe the Government would certainly consider introducing Reits here because its over-riding benefit is that it broadens ownership in property."

According to a property investor for a firm of stockbrokers firm, the likely converts to Reits are the Irish Life pension property fund or the Irish Pension Fund Property Unit Trust (IFPUT).

Mr Niall Gaffney, investment manager of IFPUT, believes by converting to a Reits-type structure, the fund could access a much wider market and would give the institutional investors the transparency they need.

He said: "The whole idea of having a transparent and tax-efficient Reit-like market would broaden property's appeal and it would be hugely beneficial to the economy as a whole."