The Treasury will drive a hard bargain with providers who are planning to develop onshore real estate investment trusts (REITs), says Chris Turner, Henderson TR Property investment trust manager.
But proposed new rules should allow property investment to become a particularly attractive long-term solution to the nation’s savings gap, suggest the fund manager.
The chief benefit of REITs for those planning for retirement compared to, say, a buy-to-let flat, is they offer stable high income of about 5% to 7% annually with little exposure to risk associated with high levels of gearing or development of new property.
In fact, the risk/reward structure is such that investors could look at REITs as an alternative to bonds, Turner says.
Evidence from other countries so far suggests proper REIT vehicles sold in a regulated environment are a good option for consumers.
"Compared to the existing £20bn free float value of the property sector, the REIT market could grow to £60bn by 2010," Turner says.
The Treasury is threatening to force existing property companies and offshore REITs that want to come onshore pay some sort of charge to "enter the club", which is unsurprising given the state of public finances, Turner adds.
However, because REITs trade at premiums to their net asset value – due to stable income yields – and come with tax advantages it means shareholders in listed companies such as Land Securities could effectively double their dividend yield merely by turning the firm into a REIT.
That lure, along with the successes of REITs in other markets will see the sector develop from a small base into something that will provide significant amounts of investor income in future, Turner says.
It means property will take its rightful place as an asset class among investors, alongside the usual mix of cash, gilts, equities and bonds, he adds.
Some major hurdles remain before REITs can be termed a success story in the UK.
The Treasury must not set the price too high for property companies looking to convert their corporate status, while there are some question marks as to who exactly will be best able to promote such vehicles, Turner warns.
The role of intermediaries in ensuring distribution of such products is also to be determined, although in this question too there is ample evidence that it will become an important part of investment advice.
Turner points to Australia, where a significant portion of the stock exchange is now tied up in such collective investments. Meanwhile, REITs have been launched in Belgium, France, Germany, and the Netherlands already.IFAonline
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