The UK government will aim to introduce Real Estate Investment Trusts (Reits) in 2006, a move that could allow people to buy their own cinemas or offices.
Reits will allow investors greater and cheaper access to real estate
Reits, sometimes called Property Investment Funds, are popular in countries such as the US and Australia.
They operate as stock exchange-quoted companies which directly own property, providing an easier and lower-cost way for people to invest in real estate.
Adding to their lure is the fact that Reits are free of corporation tax.
Time for talk
Reits are firms that can trade property assets within their portfolio without paying corporation tax
They allow people with modest means to 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
The Treasury published a paper on Reits alongside Chancellor Gordon Brown's budget on Wednesday and said it will start industry-wide consultations.
It aims to promote "greater efficiency in the property investment market", as well as "ensure that the returns from different forms of indirect or direct UK property investment are taxed in broadly the same way".
The government outlined a number of positives that may be provided by Reits. They said that Reits may:
- Give a greater, and more liquid, choice to property investors
- Allow smaller scale investors access to commercial property returns without significant capital outlays or tax inefficiency
- Improve stability in the property investment market
- Let companies release property assets from balance sheets into the hands of professionally managed companies
- Improve the housing market through greater professionalism in the private- and social-rented sectors
- Boost demand for new houses.
A number of observers, howver, have voiced concerns that Reits would expose investors to even greater risks, especially at a time when naysayers are muttering about a housing market slump.
One scenario is that should UK house prices experience a dramatic fall, that would feed into the UK economy and the commercial property sector.
In theory, that might mean investors seeing the value of their Reits shares falling at the same time as the value of their home slips into negative equity.
Research firm Capital Economics said that key questions remained regarding Reits in the UK, including whether they would have to be listed, whether they would be internally or externally managed, or whether there would be a minimum holding period for property.
Also, the amount of debt allowed to be taken on by Reits still has to be finalised, and there "is little discussion of the proposed exit tax for quoted property companies and other funds converting to Reit status".
The Treasury said it plans to publish another discussion paper this year and will legislate for Reits in next year's Finance Bill, the legislation which enacts the tax provisions of the budget.