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Bricks and mortar – the REIT way for future investment

Contributed by BILL BLEVINS

REAL ESTATE Investment Trusts (REITs) are an exciting new opportunity flourishing in the investment market, offering investors a tax efficient structure for regular income and capital growth.

The expanding global property market is fuelling the hot interest in REITs, which has become one of the fastest expanding areas of the stock market since the beginning of the decade.

REITs are already popular in the US, Australia, Japan, Singapore and France, and are now set to burgeon in the UK with their launch in January next year.

What are REITs?

REITs are investment vehicles, which pay no corporation tax, unlike existing property companies. A REIT must distribute a large portion of net profits (around 90 to 95 per cent) to shareholders as dividends, on which the shareholder does not pay capital gains tax.

A REIT will build up a portfolio of income producing real estate property, including mortgage investments across a broad section of retail, commercial and industrial property. This means shopping centres, office blocks, rest homes, factories and manufacturing premises, hotels and resorts, as well as in the residential sector.  

Since 1990, the value of the global REIT market has increased from 150 billion US dollars to more than 700 billion US dollars. When the introduction of REITs was announced in the UK, the listed property companies shares surged and the FTSE 100 shot to over 6,000 points.

REITs were introduced in 1960, in the US, only a handful of other countries followed. With there being renewed interest in REITs, it is expected that they will become available in 20 more countries around the world within the next two years.

Many people have already invested in a REIT and, as they become more accessible, thousands more will want a piece of the cake.

Income can be gained through a REIT investment – a property investment, which doesn’t involve buying and selling individual property with all the risks associated with it, such as needing to sell in a slumped market.

In the past, property investment had its limitations and was not widely available. The challenges of investing directly in property, with possible costly management and uncertainty concerning disposal, made it difficult for many investors to construct an efficient property portfolio. A globally diversified portfolio can provide greater stability and a wider opportunity than focusing on a single sector or region.

Now, REITs allow people with more modest means as well as those with substantial capital to easily invest in a diversified property portfolio. A REIT offers more liquidity, choice, is likely to return steady capital growth with high levels of rental income and will be a welcome asset to an investment portfolio.

REITs will be backed by medium to long-term rental agreements, and so should not suffer the fluctuations that often affect equities. Real estate has a low correlation with asset classes like equities and bonds, and so is a near perfect addition to a diversified portfolio. Spreading capital across wide ranging and varied investment categories, including property, helps smooth out the highs and lows of investments with long term stability and growth.

And, just as each asset class in an investment portfolio should contain a diversified mix, so should the property class include a cross section from different sectors, as well as across geographical borders. There is a growing property market in Asia offering high potential, as well as the eastern European countries coming into the EU.

There are approximately 300 real estate securities internationally and they represent only a small percentage of the total value of global property assets. The investment universe, with a listed capitalisation of around 700 billion US dollars, represents only 10 per cent of the estimated seven trillion US dollars of institutional direct property investment assets and a minute proportion of a 15 trillion US dollars global real estate market. There is plenty of room for increasing the number of property investments, which could be put into the expanding REIT market.

REIT income is almost inflation proof, as protection comes from upward rental agreements.

Bricks and mortar have always been thought of as good as having cash in the bank. REITs are better! Cash in the bank can be easily eroded by inflation and interest rates.

A REIT investment would best be managed by a Multi-Asset-Multi-Style-Multi-Manager company, such as the Russell Investment Group, which has recently launched its first REIT fund for European clients.

• Multi-Asset offers risk control at total portfolio level.

• Multi-Style means an investment with representative managers from each style category. Investment styles come and go and this approach ensures that whichever style is currently in favour is covered. The blending of management styles can help to reduce risk and produce more consistent returns.

• Multi Manager uses top financial managers across the globe with a specialist in different fields selected and monitored according to performance.

A REIT fund can also be placed in a life assurance bond, a tax efficient structure, which varies from country to country. In most countries there are savings of income tax on withdrawals, as well as exemption from tax on accumulated income until the time of withdrawal. Normally, gains made within the bond are also free from capital gains tax.

Perhaps you are a British expatriate, who was hugely disappointed when the much hyped Self Invested Personal Pension (SIPP) opportunity to include residential property in your pension fund was dashed by the UK Chancellor last year. It is possible that the REITs legislation is Gordon Brown’s peace offering.

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