HALF of all properties will be second homes or buy-to-let within 20 years, bringing an end to the post-war boom in owner-occupation.
At the Property Investor show later this month, David Lawrenson of
www.lettingfocus.com will predict: "We could easily see the proportion of property that is either let out or used as second o
r holiday homes hit 50% by 2026. Sixty years ago, more than half of all properties in the UK were privately rented. Those days could be about to return."
That process could be speeded up following the launch on New Year's Day 2007 of Real Estate Investment Trusts, which will bring property investing within the reach of modest savers.
But what are they, and are they really as good an investment as Reita - a cross-interest group set up to promote the new investment vehicles to the public - says they will be?
REITs, like other forms of share-based collective investments, such as investment and unit trusts, will pool money from a large number of investors. The funds will then buy and manage a large number of properties on behalf of its investors, which should, in theory, reduce risk by ensuring a good spread of properties, either by sector or geographically.
Reita trumpets the superior diversification that should be available to wannabe buy-to-let investors via a REIT. It says: "UK REITs will enable investors to invest in property without many of the risks associated with owning a single building and without the challenges associated with managing tenants."
The funds are also likely to appeal to a second group of investors, those, including the elderly, looking for income to top up pensions. This is because the legislation introducing REITs requires that at least 90% of a fund's profits (after charges) be distributed to shareholders.
Furthermore, some investors annoyed at the Chancellor's imposition of a tax on dividends on shares held within an individual savings account (Isa), might opt for REITs instead.
The funds will not have to pay tax on rental income for the properties held within the fund, nor will they have to pay capital gains tax when the properties are sold. This means the only tax to be paid by investors will be income tax on the income they receive from the fund, which according to Patrick Connolly, a director at financial adviser JS&P, can be avoided if the REIT shares are held inside either an Isa or pension wrapper.
Connolly, though, is cautious about the new vehicle. He says that the firm will not be putting clients' money into REITs from day one, although in broad terms he does welcome the arrival of the new type of investment fund. He explains: "We are positive about REITs, at least with regard to the theory. We support the ability to buy asset classes in different ways and are watching developments closely to determine whether there will be offerings that are suitable to use as part of our client portfolios."
But Linlithgow investment adviser Steve Forbes is more wary and believes that REITs could be "potentially dangerous" for investors. Forbes has concerns about REITs regardless of whether they intend to hold purely commercial or residential property as he believes both may be nearing the top of what has unquestionably been a tremendous run.
He is most concerned, however, about funds that intend to specialise solely in residential. Insight Investment Management recently bought a £100m block of residential properties to add to its £300m buy-to-let investment fund, which the group says it is considering turning into a REIT. Forbes says that investors need look no further than the disaster that was the Henderson Residential Property Fund if they need reminding of the dangers of investing in this asset class.
Launched in the final days of the 1980s property boom, the Henderson Residential Property Fund became one of the biggest failures ever in the UK collective investment history when interest rates doubled and the housing market collapsed. Forbes further points out that most consumers will already have a sizeable proportion of their total wealth tied up in property if they own the house they live in.
Indeed, not even all fund managers are convinced that REITs are the best way to add property exposure to an investment portfolio. According to Bambos Hambi, head of multi-manager funds at investment manager Gartmore, because REITs will be closed end funds, they will be subject to the same supply and demand issues associated with shares.
This is because the number of shares in each fund will be limited at the outset. Hambi said: "Rather than just reflecting what's going on in the property market, their performance is influenced by the same forces of supply and demand that have contributed to the recent volatility in the equity markets."
THE
RULES AT A GLANCE
A
REIT will have to make at least 75% of its income from renting out commercial and/or residential property. However, no single property can represent more than 40% of a fund's total assets.
• REITs must distribute at least 90% of the income they receive from renting out properties to unit holders.
• REITs will not have to pay tax on the income they receive from rental income on the properties owned. They can also sell properties without paying capital gains tax.
• Investors will have to pay tax on the income they receive from a REIT at 22% (or 40% for higher-rate taxpayers), unless the REIT units are sheltered from tax within a tax-free wrapper such as an Isa, Pep or Self Invested Personal Pension.
