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Reits, From The Horses Mouth

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The UK property sector is over-valued and investors would be wise to steer clear. That was the surprising message from Martin Allen, one of the most senior property analysts in the UK, in response to the best news the real estate industry has had in years.

On Wednesday, Gordon Brown produced a rare positive surprise when he unveiled a structure for the long-awaited Real Estate Investment Trusts - one that the industry seemed to think would be workable. Tesco was so impressed that it is considering spinning of its proprty portfolio into a Reit.

Property companies have been lobbying for the introduction of the tax-transparent vehicles for owning property for almost a decade. The industry argued that Reits would improve liquidity, make property more attractive as an asset class, and give investors a better way of obtaining exposure to real estate without having to buy either buildings or shares in property companies.

But the result of recent discussions with the Treasury had left industry leaders fearing the chancellor would either set the charge for converting from a traditional property company into a Reit so high that no company would take the plunge, or that it would impose onerous conditions that made them unattractive in practice.

The Treasury, for its part, feared that exempting the structures from capital gains tax and corporation tax and allowing the shareholders to pay tax on dividends at their own individual rates would lead to a net loss for the taxman.

"We made the point that this would have to be commercially workable," says Liz Peace, the chief executive of the British Property Federation. "There was no point the chancellor hanging on for every last penny on this or you wouldn't get people converting."

Others point out that after the fiasco surrounding Sipps, when investment property was at first allowed to be included in the personal pension structures and then withdrawn at the last minute, the chancellor was keen to get Reits right first time.

On Wednesday he said that although Reits would be tax-exempt, they would have to distribute 90 per cent of their profits in the form of dividends, that the shares must be listed in the UK and that no single investor can own more than 10 per cent of the company.

In addition, at least 75 per cent of the vehicle's assets must be in property and 75 per cent of its income must be in the form of property rentals. Companies wanting to become Reits will have to pay a conversion charge of 2 per cent of the market value of their property.

The Treasury had previously suggested that Reits would be obliged to pay out 95 per cent of profits, leaving little to invest in future developments, and that borrowing would be capped so that earnings covered interest payments by 2.5 times. In the event interest cover is just 1.25 times, a figure much more in line with current levels in the industry, and the distribution requirement has been relaxed.

"We think it was a good outcome," says Peace. "I can't speak for the individual companies - they will make their own decisions - but the reaction I have received would suggest to me that the major property companies would all now contemplate conversion to Reit status."

British Land, Land Securities, Liberty International, Slough Estates and Hammerson all gave a guarded welcome to the chancellor's plans.

Stephen Hester, the chief executive of British Land, says he is looking at the proposals with "a constructive mindset", adding that he is pleased the Government appears to have listened to the industry's concerns and adapted the plans accordingly.

John Richards, the Hammerson chief executive, says: "It all looks very positive." Hammerson has already converted its French holdings into a Reit.

Property shares climbed strongly on the back of the announcement with some companies gaining more than 20 per cent in value.

It was left to Allen, the property analyst at Morgan Stanley, to strike a note of caution. He points out that all the Reits provision does is return property companies to the position they were in prior to the erosion of dividend tax credits that started in 1992.

He argues that UK property companies are trading on multiples of earnings of 32.5 times, which is above their peaks in both the 1987 and 1997 booms.

"I've been a property analyst for 18 years and this is the fourth property share bubble in that time," Allen says. "I know a property share bubble when I see one and it doesn't matter whether we've got Reits or not. Property shares are over priced."

In a note published on Thursday he said it was "time to sell" and that investors looking for good returns should "take some money off the table".

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What has made you turn bear? I watch this site a fair amount and can remember you being bullish some time ago. Not gloating or anything like that, just interested to know.

And while you're at it, what have you done to Marina?

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  • 302 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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