Property Investment Funds : info

The trusts offer investors easy access to pooled property investments, which have special tax advantages, for corporations investing in real estate for reducing or eliminating corporate taxes. Reits are free of corporation tax.

The UK government will aim to introduce Real Estate Investment Trusts (Reits) in 2006, a move that could allow people to buy their cinemas or offices.
Reits, sometimes called Property Investment Funds, are popular in countries such as USA and Australia. They operate as stock exchange quoted companies which own property, providing an easier and lower cost way for people to invest in real estate.

Shares in the British property market rose 40% in 2005, but still have further to go. This means companies like troubled Minerva often operate at huge discounts to their net asset value. Its market value is £430m against assets in excess of £1.2bn.

A PIF operates as a limited or stock exchange-quoted company who directly owns property, providing easier a lower cost way for people to invest in real estate.

A UK REIT will be in the form of a company but, importantly ( not Open Ended Investment Company (OEIC)). The company must be publicly listed on a Recognised Stock Exchange. It must also be tax resident in the UK and not dual resident in other jurisdictions. These conditions must be met for a company wishing to become a UK REIT. The company must have only one class of ordinary shares in issue and no other classes of shares.

1. The company must have at least three properties in it’s portfolio throughout all accounting periods.

2. No individual or corporate body shall own more than 10% of the shares in the company.

3. The value of a single property must not exceed 40% of the combined value of all of the property business.

4. Within 6 months of the end of it’s accounting period the UK REIT must distribute 95% of the profits of the tax exempt business

The British government claims PIFS will:
Give a greater, and more liquid, choice to property investors
Allow smaller scale investors access to commercial property returns without significant capital outlays or tax inefficiency
Improve stability in the property investment market
Let companies release property assets from balance sheets into the hands of professionally managed companies
Improve the housing market through greater professionalism in the private- and social-rented sectors
Boost demand for new houses

10 benefits to clients of PIFS

1. Opportunity to own property without being directly involved in the buying, letting or selling
2. Way to diversify across many more properties and property types than you would otherwise be able to do
3. Enjoy the thrill of property speculation without all the risk
4. Significant discounts through the fund’s buying power
5. No need to keep up with the latest property hot-spots – the fund managers do it for you
6. Way to invest overseas without actually visiting the countries
7. No need to appoint/pay professionals to work out taxes due and so on – funds have a fee and charges structure built in
8. All your time need not be taken up evaluating how your property portfolio is performing – the fund managers do this for you
9. No tenants to find – managed by the fund where applicable
10. No letting voids to worry about directly – managed by the funds and their property advisers where applicable

The treasury published a paper on Reits alongside one of Chancellor Gordon Brown's budget speeches and said it will start an industry wide consultation.

The government outlined a number of positives that may be provided by Reits. They said that Reits may:

Give a greater, and more liquid, choice to property investors
Allow smaller scale investors access to commercial property returns without significant capital outlays or tax inefficiency
Improve stability in the property investment market
Let companies release property assets from balance sheets into the hands of professionally managed companies
Improve the housing market through greater professionalism in the private- and social-rented sectors
Boost demand for new houses.
Problems?

A number of observers, voiced concerns Pifs would expose investors to greater risks, especially at a time when naysayers were muttering about a housing market slump. One scenario is that should UK house prices experience a dramatic fall, that would feed into the UK economy and the commercial property sector. In theory, that might mean investors seeing the value of their Pifs shares falling at the same time as the value of their home slips into negative equity. The property industry is eagerly awaiting an update on Property Investment Funds (Pifs), a new way of investing in commercial and residential property. The trusts are already popular in many countries around the world, including Australia and USA, where they are known as Real Estate Investment Trusts (Reits). The trusts offer investors easy access to pooled property investments, which have special tax advantages. In 2005 in his pre Budget report last week the Chancellor announced a new tax efficient type of fund called a Real Estate Investment Trust or REIT for short. This will enable investors to access both residential and commercial property investments. It is likely that REITs will qualify as ISA investments, making their returns tax free. Offshore PIFs are closed ended investment companies listed on the London Stock Exchange and the Channel Islands Stock Exchanges. They offer a means of investing in commercial property without the high costs associated with direct transactions and, therefore, are more suitable for small investors. Charges on a direct property transaction are normally 5.75 per cent of total purchase price, but the cost in these funds is usually less than 1 per cent of the sum invested. At the moment, there are already considerable numbers of potential global investors with significant amounts of money trying to find a home in UK property. Introducing PIFs is likely to apply further pressure to the investment market. However, this pressure could be relieved, at least in part, by property fund managers investing outside their domestic section. Brown's view is that a Reit is a more appropriate property investment vehicle for individual pensions than buying a single property as it reduces the risks involved.

Brown hopes the UK vehicle will mirror the success Reits have enjoyed throughout the world. The global Reit market is worth around $600bn and is expected to grow to $1 trillion by the end of the decade as investors are attracted to yields and steady incomes. Under the proposed legislation, the Government has taken steps to make sure Reits don't over burden themselves with debts or new developments. 3 quarters of Reit's income would have to be from property rents, with the remainder from developments and other services. They will also be subject to 'asset tests' from HM Revenue & Customers to ensure they don't carry out much development as a proportion of their activities. An 'interest cover test' will also be imposed to make sure they aren't borrowing beyond their means. The ratio will be worked out by taking profits plus financing costs and dividing that by financing costs. This figure must be above 2.5, which is believed, will restrict participation in risky developments and non core activities. Under proposed Reits structure, property companies would pay no corporation tax but would hand 95% of net profits to investors. The Reits would withhold basic rate of tax of 22% on their distributions to shareholders and higher rate taxpayers would fund any outstanding payments.

In 2006 Shares in supermarket giant Tesco rose 3.36% to a record high on Friday after a report said it planned to unlock more value from its property assets.
The UK's biggest retailer was to place its £12bn ($21bn) freehold property into a real estate investment trust (REIT).

The legislation laying out the rules for UK REITs is due to be enacted in the Finance Act 2006 and will come into effect in January 2007.

USA

The USA Congress created REITs in 1960 to give anyone and everyone the ability to invest in large-scale commercial properties. Subsequently, REITs were introduced in the Netherlands and Australia as a means to invest in a portfolio of residential and commercial property.
They allow people with modest means invest in a diversified property portfolio Reits operate in most major western economies including Japan and the US
In the US Reits use 90% of their income to pay dividends to investors

In 1971 there were only 34 REITs with a capitalization of $1.5 billion. In 2001, the industry included 182 REITS with a market cap of $155 billion

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