UKTrends: UK residential funds could take a large slice of the market, but experts are questioning the timing of their introduction, writes Jim Pickard.
Some of the biggest names in the property industry are preparing to launch residential funds aimed at private investors. They have been encouraged by the British Treasury's recent budget announcement that it was likely to introduce tax-transparent vehicles, called real estate investment trusts (Reits), as early as next year.
Ministers are keen to give investors tax-favourable access to funds that invest in commercial property, homes or both. But with the residential property market on the edge of a slowdown, some experts are asking questions about the timing of the new products.
While most Reits are likely to be in offices and shops in the early days - as a result of most listed companies converting into Reit status - residential Reits could eventually take a growing share of the market. In the US, where the Reit market is worth $300bn (£160bn), residential comes second only to shopping centres in market share.
British Land, the listed property group that owns the Broadgate complex near Liverpool Street, has been building a £200m-plus portfolio of residential property. It intends to turn this into a Reit when ministers introduce the legislation.
Vincent Tchenguiz, the property tycoon, has invested in a Pounds 300m residential property fund set up by two former directors of Colliers CRE, the agents. The fund, Sterling Assets, has ambitions to build up a £1.5bn portfolio, which would be likely to convert into a Reit.
Similar plans are being put together by Grainger Trust, a listed company which owns thousands of homes with regulated properties. These are where tenants have guaranteed low-rent long leases on properties formerly owned by the likes of ICI and British Coal.
Grainger last week bought City North, a smaller Aim-listed rival specialising in tenanted properties, to build up its portfolio. It is likely to bring in a partner - perhaps a fund manager - to take a stake in the venture, which would convert into a Reit. Other companies are likely to find opportunities in social housing.
Unlike a buy-to-let investment, where an investor borrows tens of thousands of pounds and also takes on letting risk, a Reit would enable investors to buy a small slice in a large, professionally-managed pool of property. Potential returns would be smaller but there would be less risk.
Buy-to-let has gone from a fringe market to a dominant force in the past decade. But many new investors have been making monthly losses on their portfolios, expecting to achieve capital gains instead. With prices stagnant or worse, the sector is expected to grow more slowly or shrink in the next few years. It remains to be seen if this will put people off buying residential Reits.
"The big problem is what you might define as event risk," says Richard Smee, a real estate partner at Ernst & Young, the professional services firm. "Buy to lets are dropping like a stone at the moment. A lot of private investors will get burned quite heavily . . . will residential Reits still be of interest to them?"
In reality, these vehicles have very different qualities to property brought direct, says Charles Beer, a tax partner at KPMG, the accounting firm. Shares in property Reits may fluctuate, but will ultimately deliver dependable but dull returns to investors, he says.
"They have a challenge. To sell themselves as unexciting and not have a good yield may be hard," he says.
Ultimately, it may be from institutions such as pension funds and insurance companies that demand comes. Schroders, the fund managers, already have a unit trust joint venture called ResPUT with Grainger. At a property conference in November, delegates were asked how much money they would put into residential property in an ideal portfolio. The answer was, surprisingly, more than 10 per cent.
"Big pension funds may not want to own property directly - they don't want to deal with Mrs Jones slipping on a pavement and that kind of thing," says Phil Nicklin of Deloitte, who is leading the industry working party liaising with government over Reits. "They may be enthusiastic about residential Reits." (Financial Times service)
