Real estate investment trusts, property, investing in property,

In his March 2006 Budget speech the Chancellor Gordon Brown gave the go ahead for Reits – otherwise known as real estate investment trusts – to be launched in the UK.

For investors keen to gain from increases in property prices but without the hassle of becoming an actual landlord Reits could be a very attractive option – and there are tax benefits too.
Reits, which are already popular in America, Japan and Germany, enable retail investors to put small amounts of cash into trusts, which then invest directly in residential and commercial property.

For example, when Reits go live in the UK on 1 January next year, investors could put as little as £1,000 into a fund which would then invest in high profile property developments, such as city centre flats and shopping centres.

Reits, which will be fully regulated by the Financial Services Authority, will be listed on the stock market and investors will be able to buy and sell them in the same way as shares.
The investment trusts work by pooling investors cash to invest in portfolios of properties, which are in turn let to companies or individuals. It is expected that the Government will allow investors to hold the funds within tax-friendly Isa wrappers and self-selected personal pensions (Sipps), which also get tax relief.

An independent adviser says: ‘Reits will benefit investors who hold property through a pension or in an Isa because they will be able to reclaim the tax deducted at source.’

It is already possible to invest in property, through investment funds known as unit trusts, such as those from Jupiter, New Star, Aberdeen Asset Management and Norwich Union. However, Reits will offer a significant tax advantage. Investment income from unit trusts is treated as if basic rate tax has been deducted at source and investors cannot reclaim this tax back, even if they have invested the money within an Isa or pension.

In contrast with a Reit, this tax can be reclaimed if the investor holds the fund within an Isa or pension.

That said, some independent financial advisers warn that Reits will be much more volatile than property-linked unit trusts. This is because the performance of a Reit will perform more like that of the shares of a property company, rather than investing in a fund, which diversifies across a range of companies.

For investors it will be a case of weighing up whether the risk and volatility of a Reit is worth it for the tax advantages compared to a property unit trust.

And other advisers warn that investors should be careful not to pile into property investments at the expense of a balanced portfolio of investments.

‘Many investors have an overwhelming view that property is the cure for everything,’ says an independent financial adviser. ‘But sensible asset allocation is far more important.’