By: BILL BLEVINS
Financial Correspondent, Blevins Franks
PROPERTY OWNERSHIP has always been considered to be a lucrative investment. Today more and more people are investing in ‘buy to let’ property, relying on the increase in property value for capital growth and the rental payments for income. If you would like to own property as an investment, but are concerned about the work and problems involved, or do not have enough capital, then there is an alternative.
A much easier way to invest in property, which is accessible even to the modest investor, is through a REIT (Real Estate Investment Trust). A REIT is a listed company that owns a broad selection of property and is a structure for long term capital growth and regular income returns.
A REIT must pay between 90 per cent and 95 per cent of its profits as dividends, so they are very attractive to anyone looking for income. One of their major advantages is their tax efficient nature. Investors avoid the double taxation that investors in other property company shares face. There is no corporation tax, income tax on the rental income, stamp duty or other capital gains tax. The only tax the investor needs to pay is tax on the dividends that a REIT pays.
Direct property ownership can be fraught with hassle. It requires large capital outlay and maintenance costs, tenants have to be found and rents collected. There are also acquisition costs, such as estate agents’ fees, lawyer’s fees and stamp duty. Then there is tax to pay on rental income, council tax, other possible local property taxes and capital gains on disposal.
An accountant usually needs to be employed. When a property owner wishes or needs to sell, it can be a lengthy process. You cannot rely on getting the cash if needed in a hurry and there is always the possibility that a market slump means that you may have to take a loss or not realise as much as you had hoped.
Compared to this, investing in a REIT has many advantages. Instead of owning a single property in its entirety, an investor in a REIT would own a piece of a professionally managed property portfolio.
One of a REIT’s main strengths is diversification. It can provide broad exposure to all areas of the real estate market. A REIT owns prestigious property across the globe. The mix will spread through commercial, industrial and residential real estate such as office blocks, holiday resorts, factories, residential sectors, hospitals and shopping malls.
It spans across emerging markets in Eastern Europe and Asia, including Hong Kong and the positively developing Japan, Continental Europe, the UK, Australia and North America.
A REIT helps to build a strong portfolio by diversifying beyond equity and fixed income holdings. A REIT should be included in a well diversified portfolio, ideally also containing global equity and bond funds and cash.
Property has a low correlation with equities and bonds, and is unlikely to be affected by any adverse performance in these asset classes. Indeed, if either equities or bonds took a downward turn, it is likely that property prices will be rising or at least remaining strong.
Property investment is protected against the effects of inflation through virtually assured capital growth brought about by rising property values and high yields secured by long term rental contracts index-linked to inflation. A REIT is not affected by interest rates. If you left your capital in the bank it would be attacked by inflation at the mercy of the bank base interest rate.
As well as being free from the many taxes associated with direct ownership of property, a REIT can be placed in an offshore life assurance bond which shields the investment from unnecessary taxation and can, in some circumstances, mitigate or eliminate tax altogether.
Other key benefits
• Liquidity – Shares in a REIT can be easily bought and sold, unlike a property owned directly. Transference costs are much lower too.
• Risk reduced – Diversification within a REIT, and again within a portfolio, spreads and lowers risk.
• Maintenance free – Property held in a REIT means you do not need to waste time and costs on maintenance, securing responsible tenants and rent collection etc.
• Multiple properties – A REIT allows you to own shares in companies which own multiple prestigious real estate across the world, property that even the more experienced private investor would find difficult to access.
• Minimal outlay – Acquiring REIT shares involves a minimal outlay compared with directly buying property.
Choosing a REIT
Choose a fund which offers a high level of diversification across sectors and globally. Ideally it will include real estate in Australia, North America, Europe and Asia.
This will combine the established and strong markets with the fast developing ones where potential for growth is significant.
For even further diversification, select one managed by a multi manager company. The company would employ some of the real estate manager investment managers used by large institutional investors, so you have some of the world’s top managers looking after your money.
This additional layer of diversification helps lower risk and improves opportunities for income and long term capital growth. An established multi manager REIT fund is available for expatriates.
A REIT fund is suitable for retired expatriate investment and wealth preservation because of its potential for capital growth, regular returns and protection against inflation.