Stocks Section

Many in the finance world seem to be getting excited about the introduction to the UK (in January 2007) of Real Estate Investment Trusts (REITs), but we’d actually be far more cautious of their success due to the timing of their introduction.

What Are REITs

• A pool of investors' money which is invested in physical property both commercial and/or residential, the shares will then be listed on the stockmarket and will be able to be bought or sold like any other
• There are already property funds in the UK but REITs will be far more tax-efficient and more flexible
• For example, a present UK property fund is not usually allowed to invest in residential property and must have at least 20% of its funds invested in property shares
• REITs will be able to invest 100% in property
• For more information see the LearnMoney.co.uk article entitled What Are UK REITs & Why They Will Be Excellent Tax Efficient Vehicles For Investing In Property

What’s Wrong With The Timing of The Introduction Of REITs

Let’s look at the history of REITs in the USA -

• They were introduced in the early 1990s when US property was in a state of dire distress
• The introduction was intended to give the sector a real financial boost at a time when many owners and investors were near/at financial death
• Obviously the REIT sector in the US grew naturally with the rise in property values and rents
• BUT, this is far from the case here in the UK, property is booming, landlords are generally rich and a glut in commercial property is starting to appear
• REITs will not fill offices with tenants nor will they increase rents or do anything else to add to the health of what’s an already very healthy market

Summary

Have you watched one of those property programs on TV recently? All of the buyers are in a mad rush to buy today because the 'property will only be worth more tomorrow' etc. And this seems to be the same mentality with REITs, 'property only ever goes up' so REITs in turn must be good buys.

But property is just another asset class which moves in both up and down cycles. Remember, the phrase 'negative equity' has only been abolished from the English language in the last 10 years. We're not saying that REITs won't perform but it would be dangerous for investors to chase yields down to unreasonable levels which we fear may be the case.

Also, look at how much of your personal worth is already invested in property, including the house/flat you live in. If it's more than 33% then investing in yet more property may well leave you dangerously exposed to an asset that has already enjoyed considerable price inflation.

See Also

• LearnMoney.co.uk article on REITs
• Find's list of Online Stockbrokers