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Last Updated: Friday, 5 March, 2004, 00:07 GMT
Buy-to-let for everyone
By Julian Knight
BBC News Online personal finance reporter

Bluewater shopping centre
Your future wealth could be tied up in the local shopping centre

Fancy owning your local shopping mall, cinema or even the office in which you work?

A new type of investment that may allow you to do just those things is likely to be given the green light by the Chancellor in his Budget on 17 March.

Britons are used to making money out of their homes.

Soon through Real Estate Investment Trusts (Reits) they may get the opportunity to make a killing on another type of property investment which has served many global investors well.

However, some experts fear that Britons are about to invest their fortune in bricks and mortar - just when many economists are predicting the UK property market is heading for the rocks.

Does investment heaven or financial hell beckon?

Tasty carrot

In the United States, France, Australia and Japan, Reits are in full swing.

They are quoted companies which directly own property but with the twist that they are free of corporation tax.

Reits key facts
Reits are firms that can trade property assets within their portfolio without paying corporation tax
They allow people with modest means invest in a diversified property portfolio
Reits operate in most major western economies including Japan and the US
In the US Reits use 90% of their income to pay dividends to investors
Last November, in his pre-budget report, the Chancellor signalled that he was considering introducing Reits

In the US, the tasty tax-free carrot has tempted many firms to spin off the buildings they own into Reits and invite people to buy shares in the property.

As a result, stateside it is possible to own shares in hospital buildings and prisons.

The buildings are leased to local authorities and firms in return for rent which is paid back to the investor.

In total, US investors have poured an estimated $200bn into Reits since 1990.

And last year the share price of US Reits surged by 39%, more than the average for the American stock market as a whole.

Reits popular

In Britain, the advent of Reits could attract an estimated 60bn of investor cash by 2010, according to city firm Henderson Global Investors.

"Reits are likely to prove popular with investors," said Chris Turner, fund manager at TR Property investment trust.

"As a rule of thumb, when shares do badly property tends to do well, a Reits provides a good hedge against the stock market,"

In turn, the government hopes that investor cash will be used to boost the provision of private rented accommodation, easing the UK's housing shortage.

What is more, if the Chancellor adopts the US model for Reits then investors looking for income may have cause to cheer.

The alarm bells are ringing loud and clear...Some Reits, particularly those invested in commercial property, may be sound but others could be very risky
Brian Dennehy, independent financial adviser

Under US rules, Reits are duty bound to pay 90% of their income to investors.

"A share in a UK property company yields something like 3% a year but under Reits status we estimate that this could double," Mr Turner said.

This opens up the prospect of retired Britons living off the proceeds of the local multi-storey car park or shopping mall.

Alarm

However, some independent financial advisers (Ifa) are far from happy at the advent of Reits.

"The alarm bells are ringing loud and clear," Brian Dennehy, managing director of Ifa firm Dennehy, Wellar and Co, told BBC News Online.

"The last thing the UK property market needs is another injection of cash. In my view too many people are overexposed to the property market through their mortgage debt," he added.

Prison cell
Americans can buy shares in prison building

Recently, City firm Durlacher predicted that UK house prices would fall 30% from the second half of 2004 onwards.

Such a dramatic fall in UK house prices would hit the UK economy and the commercial property sector.

Ugly spectre

This raises the ugly spectre for some investors of seeing their Reits shares fall in value while their home slips into negative equity.

What is more, according to Mr Dennehy, the tidal wave of cash predicted to flow into Reits brings the danger of another mis-selling scandal.

"Some Reits, particularly those invested in commercial property, may be sound but others could be very risky. The Financial Services Authority, the city regulator, needs to ensure that Reits are sold properly and the risks explained to investors," he said.

But the investment industry is confident that Reits will not join the depressingly long list of mis-sold financial products.

"The government is well aware of the risks. When the rules for Reits emerge, I am sure we will not see a free for all. Traditional commercial and residential property developments will be at the heart of the trusts rather than wilder investments," Mr Turner told BBC News Online.




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