Concrete Plans: They Do Say That Rome Wasn't Built in a Day, but It's Taken 20 Years to Get the Government to Consider Introducing Real-Estate Investment Trusts (Reits) to Encourage Both Institutional and Private Investment in the UK Property Market. Anita Howarth Explains Why Reits Would Be Hard to Beat as a Way of Helping to End the Country's Chronic Housing Shortage

By Howarth, Anita | Financial Management (UK), March 2004 | Go to article overview

Concrete Plans: They Do Say That Rome Wasn't Built in a Day, but It's Taken 20 Years to Get the Government to Consider Introducing Real-Estate Investment Trusts (Reits) to Encourage Both Institutional and Private Investment in the UK Property Market. Anita Howarth Explains Why Reits Would Be Hard to Beat as a Way of Helping to End the Country's Chronic Housing Shortage


Howarth, Anita, Financial Management (UK)


The UK property industry has been built on patience. A big shopping mall in a city centre can take 20 years from start to finish; a major regeneration project may take even longer. Such experiences have given industry leaders a stoicism that comes in handy when they need to lobby the government: it has taken them two decades to get ministers to agree to consult on much-needed legislative reforms.

The breakthrough came when the chancellor announced in December 2003 that he would publish a consultation paper in March that would "consider the most appropriate structure and conversion charge for a tax-transparent property investment trust". It meant that Treasury had at last been persuaded that such vehicles real--estate investment trusts (Reits)--could help to regenerate inner cities and boost the UK economy as a whole.

The idea of a Reit (pronounced "reet") is that assets are put into a trust-type structure in which investors can buy shares. Reits are often used to protect a company from corporation tax and capital gains tax. Returns on investment are based on the performance of the property' rather than that of the company's share price. In some countries a Reit has to distribute a large proportion possibly as much as 75 per cent--of its taxable income to shareholders as dividends. But an upfront payment to the government is often required when the trust is established.

David Hunter, chief executive of Aberdeen Property Investors, has been heavily involved in the lobbying campaign. He attributes its success this time round to the fact that the industry presented a united front to the Treasury in arguing that Reits would benefit the wider economy rather than property developers alone. He identifies three factors that helped to swing the argument:

* There is a growing demand from private investors who want to invest indirectly in property but cannot do so under the current rules.

* The housing market is facing a chronic shortage of supply and desperately needs institutional investors.

* As property taxes continue to rise, there is a greater risk that deals will be done offshore, resulting in lost revenue for the Treasury.

The first factor proved particularly persuasive to the government. Ministers are keen to open up the market for private investors and oilier them more choice as to where they put their savings. There is a demand for property-based financial products, and Reits can be seen as an extension of this market.

"Lots of people with lots of money are trying to get into property investment, but it is difficult to do so, particularly for the man in the street," says Ian Fletcher, director (commercial and residential) at the British Property Federation. "Buying to let is about the only option, and that is beyond the means of most people."

Reits would give non-institutional investors the chance to buy shares in an office block or shopping centre, for instance, but the danger is that unwary investors could be mis-sold unsuitable products. "It will need legislation and also some regulation by the Financial Services Authority; because there will be people who don't understand property products who would seek to sell them," Hunter says. "But this regulation must not be so heavy that it makes Reits unworkable."

The British Property Federation and the Royal Institution of Chartered Surveyors (RICS) estimate that countries which have introduced indirect investment vehicles such as Reits have seen an 830 per cent increase in their total property market capitalisation since 1989. Countries that have not had these vehicles in place have experienced a 28 per cent decline in total property' market capitalisation over the same period.

Investing in commercial property is difficult enough, but investing in residential property can be even harder. It's a market that not even the institutions have managed to penetrate. The total value of the UK's private housing stock was 2. …

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Concrete Plans: They Do Say That Rome Wasn't Built in a Day, but It's Taken 20 Years to Get the Government to Consider Introducing Real-Estate Investment Trusts (Reits) to Encourage Both Institutional and Private Investment in the UK Property Market. Anita Howarth Explains Why Reits Would Be Hard to Beat as a Way of Helping to End the Country's Chronic Housing Shortage
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