Real-Estate-Investment-Trust.co.uk

The guide to investing in Real Estate Investment Trusts in the United Kingdom

What are Real Estate Investment Trusts

Real Estate Investment Trusts(REITS) are tax efficient vehicles that will invest in commercial and residential properties. They are common in other countries, particularly the USA and Australia, but were only sanctioned by Gordon Brown in his pre-budget statement in December 2005 and details of the legislation announced in the March 2006 Budget.

Real Estate Investment Trusts will pay no Corporation Tax if they distribute 90% of net profits to investors. Three quarters of income must come from property rents but the remaining 25% can come from development and services.

Most property companies are expected to convert to REIT status. It is expected that the government will allow REITS in savings products such as individual savings accounts(ISAs) and child trust funds. Property companies in the UK have traditionally traded at a 10% to 25% discount to net assets. REITs often trade at a premium to net assets, with the premium being as high as 25% in continental Europe. Over the next few months we can expect the already inflated commercial property sector to be gaining further attention as investors adjust the value of UK property companies that move to the REIT structure.

Analysts predicted that the size of the listed property sector, which has shrunk over the last few years because companies were taken private, would dramatically increase in size with perhaps a doubling of the sector by the end of 2008.

[Click here for a guide to companies likely to convert to REITs]

Why are Real Estate Investment Trusts good investments

REITS are worth hundreds of billions of pounds in other countries where large numbers of investors appreciate the high yield and steady stream of income. REITS give individual retail investors access to a diversified portfolio of property without the risks and administrative burden of direct ownership. The chancellor highlighted REITS as a suitable investment for people wanting to place property assets in their Self-Invested Personal Pensions(SIPPs). He said that REITs were more suitable as pension investments because they were less risky than investment in a single property.

[Click here for a guide to the investor benefits of REITs]

When will I be able to invest in REITS

The new legislation forming the Real Estate Investment Trusts will form part of the 2006 Finance Bill and property companies planning to convert may do so after January 1 2007. The charge for converting to a REIT was set at 2% of UK assets and this encourages companies to convert to a REIT. Hammerson, one of the FTSE 100 property companies, will incur a charge of £80 million but has already made provision of over £300 million for deferred tax which, upon conversion will no longer be payable. It is unsurprising that the commercial property companies, having already had a good increase in share prices, continue to be buoyant.

Latest REIT News-Hammerson benefits from REIT conversion charge

Hammerson is the UKs fourth largest property company and the first FTSE 100 property company to announce that it will convert to Real Estate Investment Trust status in January next year when the legislative framework is in place. Hammerson, which is best identified by its part ownership of the Brent Cross Shopping Centre and its development of the Bull Ring in Birmingham, has over £4 billion of UK assets including both retail shopping malls and office accommodation. It has accrued some £365 million of differed tax provision on that portfolio but will have to pay only 2% of the asset value for property converting to REIT status. The 2% payment will cost some £80million but the first installment of that money does not need to be paid until July 2007. The elimination of the tax liability will result in an immediate 8% gain in shareholders equity. Hammerson chairman John Nelson told investors the switch into a Reit 'will provide additional opportunities to grow the business over the next few years.' He also highlighted that surpluses from its development programme would be tax exempt provided developed properties are retained for three years, adding that investors would be investing in Hammerson on the basis that their investment is taxed only once, rather than twice. Hammerson was also the first UK property firm to convert part of its portfolio into a similar REIT type scheme in France in 2004.