Real Estate Investment Trusts

The announcement by the Chancellor in the December economic statement that the Treasury is considering the introduction of UK Real Estate Investment Trusts (REITs) has generated high hopes within the property industry.

Speaking at an AITC event on prospects for property investment trusts, Chris Turner, Manager of the £444m TR Property Investment Trust, was enthusiastic for the potential of UK style Real Estate Investment Trusts. He added that if properly executed, UK style REITS could be the saviour of property shares and also offer improved protection for investors.

Chris Turner, Manager, TR Property Investment Trust said: “UK REITS structure needs to be workable. A horse designed by a committee can all too easily turn into a camel, and it’s important to remain cautious until we have more details. Properly executed however, UK style REITS will be the saviour for the property share sector. Whilst a slow start may be anticipated, there is a need for more onshore, regulated property companies with modest borrowings, and the introduction of UK style REITS could encourage exactly that. The tendency of REITS to trade close to NAV would be an additional boost to the health of the sector and its appeal to private investors. Over the long term, UK style REITS could help the quoted sector’s market value grow from the £20 billion we see today to £60 billion by 2010.”

Over 1, 3, 5 and 10 years TR Property Investment Trust’s share price is up 47%, 63%, 181% and 189% respectively. The trust currently trades on a 9% discount and has modest gearing (borrowing) of 24%.

Commercial property coming in from the cold?

Chris Turner believes that, as an asset class, commercial property is coming in from the cold: “Its qualities of stable high income and portfolio diversification have been overlooked by too many investors in the past twenty years. Booming residential property values have more than doubled in the past seven years while commercial property capital growth has only averaged 25%. This performance gap should start to close as the economy recovers and this is something we are looking to exploit in TR Property’s portfolio.

“The outlook is for increasing tenant demand, and investment demand is already strong with buyers out numbering sellers by up to 5 times for decent buildings. Property is looking increasingly attractive compared to other asset classes. More retirees are looking for stable high income with the potential for inflation protection that bonds cannot offer. Bricks and mortar are tangible, rent is a first charge on a tenant’s business, and in a Parmalat situation the landlords of the buildings suffer far less than the equity or bondholders.”

Annabel Brodie-Smith, Communications Director, Association of Investment Trust Companies (AITC) said: “Investors looking for exposure to property may well like to consider an investment trust investing in this area. The closed-ended structure of investment trusts lends itself well to investing in property shares and direct property. This is because fund managers can take a long-term view without having to consider variations in the size of the fund, meaning that prime property, or stocks, do not have to be sold to meet redemptions.

“The potential of UK style REITS is an exciting prospect. However, there are a number of conventional property investment trusts that have been delivering solid returns for shareholders for many years and deserve a closer look.”

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