Assetz® News - REITs expected in Brown\'s pre Budget speech

REITs expected in Brown\'s pre Budget speech

5th December 2005 |

It seems increasingly likely that Gordon Brown will today introduce Real Estate Investment Trusts (REITs) and the impact upon residential and commercial property is expected to be significant.

A REIT is a corporation or trust that uses the combined capital of a number of investors to purchase and manage income property and mortgage loans. As such, they are traded on major exchanges in an identical manner to stocks.

The significance for property investors is that REITs are granted special tax considerations and can provide advantages over actually owning property. In opposition to traditional real estate, REITs promote liquidity, and they also facilitate sharing options in non-residential properties. Investors have also been attracted to the fact that REITs do not necessarily increase and decrease in value in correspondence with the general market.

It was originally believed that REITs would be introduced in 2007, but the Sunday Times reported that Gordon Brown is likely to announce a commitment to early legislation which will allow the REITs to come into effect by the summer of 2006.

The idea behind REITs came last year from Kate Barker, a member of the Bank of England Monetary Policy Committee, who suggested that they would encourage the development of affordable housing for people with lower earnings. It has been reported that the effect may be in absolute opposition to its intentions depending on the restrictions imposed.

Reuters has suggested that if there are no restrictions on the type of property that can be put into a residential REIT, house prices may in fact rise "as fund managers scramble to buy up properties in competition with buy-to-let investors and other homebuyers".

It was today reported in the Financial Times that because REITs do not pay corporation tax in accordance with the fact that tax is paid only at the shareholder level on dividends received, it is extremely likely that there will be an increase in the size of the listed property sector and its profile.

One of the key changes is that smaller investors will be allowed greater influence in the commercial property-sector, while institutional investment will be afforded more prominence. REITs do, however, pay yields in the form of dividends irrespective of the way in which the shares perform.

Reuters predicts that the announcement of the introduction of REITs could lead to gains in the already increasing share prices of quoted property companies.

Stuart Law, Managing Director of Assetz plc, a leading property investment adviser, confirmed that investors do not need to wait for REITs to get their benefits today "With property funds like our newly released Property Unit Trusts now on the market and the Chancellor confirming that they are perfectly suitable for SIPPs, and what's more is that they can borrow normal levels rather than the ridiculously low 50% of net assets suggested previously for direct investment, investors have a much safer and more diverse investment via a fund than buying directly a single property. Like REITs they are tax transparant to SIPP and SSAS pension investors and what is more they are available today and allow normal levels of gearing rather than the restricted borrowing likely under the new REITs legislation. We applaud the removal of direct residential investment in SIPPs and are sure the tax incentives will drive many people to SIPPs and to our funds rather than buy themselves directly."

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