How will Reits affect my investment?

By THIS IS MONEY
Updated:

 

Lots of articles have said how great Real Estate Investment Trusts (Reits) will be for the private investor but what I don't understand is what will happen to existing property funds if the companies they invest in all convert to Reits? Should I go ahead or hang on? What are the risks?KB, Wycombe

Nigel Bolton, head of European Equities at Scottish Widows Investment Partnership, says: This is a very interesting question but not necessarily an easy one to answer at this time.

While the Government has issued draft legislation, it is still working on some important aspects of the new rules. There are also some large gaps in the legislation which will only be filled in the months ahead.

One of the biggest gaps at the moment is the one-off tax 'entry charge' that property companies will be required to pay in order to convert to REIT status. The level at which this is set will determine how many companies choose to convert and so will have a significant impact in determining the overall effect of REITs.

We will only have a full picture of the impact when the government publishes new legislation, which will probably be announced in the 2006 Budget. Until these gaps are filled and legislation finalised, it is extremely difficult to forecast what the exact effect of REITs will be on existing property funds. Howe

However, it is important to consider two points. Firstly, the Government has signalled that companies will only be able to enter the REITs regime from 1 Jan 2007 at the earliest so this is not a change that will have any practical impact for at least 12 months.

Secondly, and perhaps most importantly, the introduction of REITs is part of an attempt to encourage investment in property. In this case, it would be hoped that the introduction of REITs rules will not have an adverse impact on existing property funds. Indeed our experience in France, when REITS were introduced, is that quoted property companies will see a significant benefit in their valuation levels.

For a guide of what could potentially happen to the UK property investment market, it may be useful to look at what has already happened in the US. REITs have been available for several years in the US and have become the normal way for private investors to hold real estate, primarily because of the tax advantages and liquidity. It is likely that a number of existing companies and direct property funds would convert to a REIT structure as this would provide a more tax efficient vehicle.

If the UK does follow the US model (and it must be pointed out that there are no guarantees of how the market will develop at this stage), there are likely to be more REITS created (all listed on the stockmarket like a normal company) than there were listed property companies before.

This would be a positive change for investors and listed real estate securities funds which will have a much larger range of investments to choose from.

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