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Reits a success despite property market problems, say investment managers

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The launch of real estate investment trusts in the UK a year ago has been a success despite the problems encountered by the country’s commercial real estate market over the past 12 months

The launch of real estate investment trusts in the UK a year ago has been a success despite the problems encountered by the country’s commercial real estate market over the past 12 months and the indifferent performance of many of the new vehicles, say members of Reita, the educational and awareness campaign for Reits and property investment.

At a Reita press briefing at Deloitte’s City of London offices, Patrick Sumner, head of property at Henderson Global Investors, argued that the drop in values last year had nothing to do with the establishment of Reits – there are now 18 UK Reits with a total value of nearly GBP30bn – but was mostly down to rising interest rates and the effects of the US sub-prime mortgage crisis.

He notes that the values of real estate companies had risen by 60 per cent in four years to 2007, but over the past three years hedge funds and other speculative investors had piled into property, and then got out again. Sumner quoted Francis Salway, chief executive of Land Securities, as saying a correction was needed, but that the sub-prime crisis had resulted in an over-correction.

City commercial rentals offer a negative yield in 2008, Sumner said, with rent averaging 7 per cent of the total cost of a building, down from 11 per cent in l980. By contrast, shopping centres tend to offer steadier income with a lower yield, but even malls are seeing less than 1 per cent retail rental growth; the last time growth went into reverse was 1992.

So far the complications of institutional investment in residential property, notably the need to bundle together a large number of properties to create a viable investment proposition, have defied the potential attractions to wholesale investors of a UK buy-to-let market worth some GBP200bn, according to Deloitte strategic adviser Nick Ritblat. However, the returns are currently not attractive enough, said Harry Hyman, managing director of Primary Health Properties.

Edmund Craston, head of European real estate at Lehman Brothers, reiterated the benefit of converting real estate portfolios to Reits, thus avoiding capital gains tax. He also noted that the disadvantage of open-ended property funds had been highlighted as managers ran out of cash for investor redemptions and were forced to impose lock-ups to prevent assets having to be liquidated at fire-sale prices. By contrast, investors seeking to exit from closed-ended funds do so through stock market transactions that do not entail the sale of assts from the underlying portfolio.

Hyman argued that IFAs and their clients should invest in Reits through monthly subscriptions in order gradually to create a substantial yield-delivering stake. If this is done through an Individual Savings Account wrapper the investment can be tax-free apart from stamp duty.

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