Reits: a new and better way into UK property?

Want to buy into the lucrative returns on offer in commercial property on favourable tax terms? Well, in most of the world, you can - via a real estate investment trust (Reit). The aim of these trusts is to stop property gains being taxed twice. They work like this. The trusts pool investors' money and use it to buy a portfolio of properties, which are then let out, and the trusts' shares are listed on the stockmarket. Rental income and profits from the sale of assets within the trust are then tax-free for as long as the Reits distribute most - 90% in the US and Japan - of their earnings to investors as dividends.

They also offer small investors a "lowish risk, liquid way" into property, says The Economist, and tend to trade at less of a discount to their net asset value than other property-based companies. It is a formula that works: Reits are popular all over the world. In the US, where they've been around since the 1960s, they really took off in the past 15 years and grew from managing less than $10 billion of assets in 1990 to more than $400 billion today. Australia started its Reits in 1971, followed by Japan in 2000, and South Korea and Singapore soon after, and now Malaysia has them. Nearly 200 funds are registered around the world and this is set to keep rising: France legislated for Reits in 2002 and the UK may follow.

In Asia, where the market didn't really begin to expand until a few years ago - it's now worth $23bn - the logic for investing in Reits is simple, says Assif Shameen in BusinessWeek. Interest rates on savings accounts in Asia, from Singapore to Hong Kong and Tokyo, are hovering below 1% per annum, yet the region's Reits are paying out 5% to 9% on average thanks to a steady stream of revenue from rents and the rise in regional property prices. Property prices in much of Asia are rising and even in Japan they appear to have stabilised at last. Next month, the focus will be on Hong Kong, where the housing authority is about to launch a "whopper": 1.75 million square metres of shops and car parks worth up to $4.5 billion. That's about 30% of the market value of Japan's 13 Reits put together.

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But what of the UK? Thanks to those investors who bet that the Government would soon introduce Reits, firms such as Land Securities (LAND, 1,235p) and British Land (BLND, 780p) outperformed this year, though they could change into Reits to reap the tax rewards. The discount to forecast net asset value has already narrowed to 9% for Land Securities, and it "should go further" as Reits get closer, says The Daily Telegraph.

This doesn't mean investors should rush to buy. What if Reits don't come to the UK? Many predict that we won't see Reits legislation until after the election, expected next year. Even then, there are concerns about conversion costs, regulations and the extent to which Gordon Brown will trim the tax advantages. Property companies are therefore subject to political risk and the whims of the Chancellor. There was, for example, no mention of Reits ahead of November's pre-Budget report and share prices in the property sector were markedly weak as a result. Perhaps now isn't the best time to be picking up property companies. Commercial property returned 17.1% in the year to September, but few are expecting a repeat, and UK residential prices are falling. As those investors who lost their shirts in Hong Kong and Tokyo in the 1990s will know only too well, when property prices fall so do shares in property companies. Reits or no Reits.