MANY READERS will just be starting to hear the term REITs and will want to know what they are. Expatriates needing to finance long retirement years in the sun will be particularly interested. The income they provide, as well as capital growth over the longer-term, will be very welcome to retired people.
REITs is the new buzzword in financial planning and, since the UK Treasury recently announced that it is introducing REITs from January 2007, REITs will soon become as familiar a name as ISAs and PEPs to the discerning investor.
Real Estate Investment Trusts (REITs) are the headache-free way of future property investment. Listed on the stock exchange, REITs comprise an expertly selected collection of income producing property from across a broad spectrum including retail, office, industrial, residential, hotels and healthcare. REITs are low on tax. They are closed-ended entities, free of corporation tax, and will not pay capital gains tax on properties sold. This benefit is given in return for having to distribute the majority of their income to shareholders as dividends.
Access to property investment on a commercial and diversified scale has so far been limited. Many people’s property investments have, perhaps, consisted of one or two houses or apartments, including the one they live in, that may have had high maintenance, high capital gains on disposal and sometimes difficulty in liquidating the assets if the need suddenly arose. Part of the attraction for REITs is ease of liquidity.
Another key factor is that REITs are protected from the detrimental effects of inflation through capital appreciation and upward rental agreements. A large proportion of the income will come from secure long-term rental income in the commercial sector. REIT companies will look for good quality tenants, such as household names in the retail sector and government leased property in the office sector. The longer the lease the better, especially if linked to a rise in inflation.
REITs are also extremely attractive because they hold property, not only from across different sectors, but also from different reaches of the globe. The potential growth factor in Asia is particularly exciting. Japan and China are at the start of massive growth, Hong Kong and Singapore commercial property sectors look good and strong.
In Europe, the frenzied amount of building that has been going on in Spain and eastern bloc countries hopeful of entering the EU, has seen property building break out in a fever – residential, hotels, resorts and shopping arcades all add to the choice available for the property pot. Infrastructure and regeneration is going on in all new and potential EU countries and will do so for years to come. Last year, European cross border acquisitions of commercial real estate totalled 27 billion pounds sterling. Private property assets made up 39 per cent of this figure.
REITs are actually not that new. They have been around in the US for a number of years and introduction followed in Japan, Australia, France, Holland and Belgium. In fact, just over 70 per cent of the global real estate market is held in a REIT type structure. With the UK coming on board next year and Germany soon, the percentage will rise to nearer 90 per cent.
The value of the global REIT market has soared to more than 700 billion dollars up from 150 billion dollars in 1990. As soon as the launch of REITs in the UK was announced, shares in listed property companies jumped as much as 10 per cent, and the FTSE 100 closed above 6,000 points. It is expected that most property companies in the UK will be looking to convert to REITs as soon as possible.
The value of the global real estate market stands at seven trillion dollars. Internationally, there are around 300 real estate securities representing just a small portion of the total value of global property assets. Global real estate securities today constitute around 10 per cent of a five trillion global institutional real estate universe and so there is plenty of scope for REITs investment.
Over the past 10 years, over 100 billion pounds sterling has been invested in property funds, confirming that it is a sought after asset class and making it an excellent complement to a diversified investment portfolio. Real estate has a low correlation against equities and bonds, so adding property as an asset class will introduce another element that counterbalances the highs and lows of equities, thereby helping to reduce risk even further.
Property has been poorly represented in investment portfolios in the past. The challenge of direct property investment, its demands of high cash outlay and difficulty in liquidity has excluded many investors from gaining access to this asset class. Investing in property through a REIT fund is a relatively simple and stress free involvement that offers many benefits without the hassle.
Professional advice may be needed to pick the REIT fund to suit your circumstances. There will soon be an influx of choice and the astute investor will be well advised to seek the services of an experienced financial consultant who has already done the groundwork and has an established record in successful investments.
Tax efficient in itself, a REIT can also be ‘wrapped’ in a life assurance bond and placed offshore for even greater tax savings. Again, expert advice is paramount to get the best out of your investments. After all, you are looking for a long and happy retirement without financial worries, and you’ll want to leave a sizeable inheritance to your children and grandchildren.
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