A further step forward

THE total return from the HSBC/AREF Pooled Property Funds Indices, All Pooled Funds in Q1 2006 was 5.2pc, in excess of the returns from Q1 to Q3 of 2005 but below the very strong Q4 return of 7.4pc. The 12 month return to the end of March 2006 was 23.5pc - its highest level since the index began in December 1990.

Despite the strong return from direct property this was exceeded over both 12 months and three years by even stronger returns from both FTSE Real estate and FTSE All Share over these time periods. Real Estate securities performed particularly strongly returning 16.9pc over the quarter, driven by the surge in shares prices due to the REIT announcement by the government. It will be interesting to see whether this continues over the remainder of the year.

Although the FTSE All-Share continues to deliver higher returns with 8.1pc, gilts had a very poor quarter returning -1.1pc. Property therefore continues to maintain its long term position of returning between equity and gilts.
The strong returns continue to be driven by the weight of money coming into the market as demand for property investment drives down yields.

The last three-to-five years has seen an enormous growth in demand for UK real estate as asset allocators, investment consultants and private investors become more aware of the merits of the asset class. In particular the diversification benefit of having an exposure to property within a balanced portfolio is now more fully recognised.

In the March budget, the government cleared the way for the arrival of real estate investment trusts (REITS) in 2007, primarily to provide a viable alternative investment vehicle for commercial and residential property and open up the UK commercial property market to allow participation by small retail investors. For retail investors there have been barriers to investing in the property market, not least of all the large individual lot sizes which has meant buying direct has not been realistic for most retail investors; certainly would not give them sufficient diversification.

In addition some of the vehicles which held commercial property did not always come in a form which was liquid and tax efficient to retail investors.

At face value, REITS maybe the product retail investors have been waiting but in reality in the light of the huge demand by investors, both institutional and retail alike for commercial property, the property market has already come up with some innovative solutions which have satisfied at least some of that demand.

AREF contains most if not all of the UK’s leading property fund managers who are providing to investors a whole range of fund types. For example: Authorised property unit trusts which can now hold 100pc of their assets in commercial property and more recently have been approved such that they can be held in an individual savings account.

Offshore property unit trusts, whose number have grown significantly in recent years, have improved their tax efficiency as well as their marketing and investor reporting. Also, in addition to the more traditional pooled vehicles, there are now many specialist funds allowing investors access into particular property types.

Life and pension products were once the only viable way for retail investors and long term savers to gain exposure to the market, and given the emerging competition you would have thought it may be a dying breed. Quite the opposite in fact, investors have continued to make positive decisions to divert larger proportions of their monthly savings to these products.

Over the last four years we have also witnessed the emergence and growth of the listed property investment company. These companies are based offshore, but listed on the London stock exchange. They offer a great deal of REIT-type characteristics, namely they are tax efficient and have the main objective of distributing rental income to shareholders by way of a competitive dividend.

And of course there is still the current listed property company sector, but even in the post-REIT world, those companies who choose not to convert to REITS, for example a development company focussed in a specialist market, will continue to have a following despite any fiscal shortcomings they may well have.

REITS, despite the hype, are not going to completely replace any of these other investment routes. For many investors, REITS will be a very valuable addition to the product menu. For some they will be the product of choice to the extent they will be the catalyst which opens up the UK commercial property market to a sizeable section of the retail investment community who may have never invested in the market before or whom have never thought it possible.

The arrival of REITs should be applauded for the positive sentiment it has generated towards the property market. It is yet a further forward step in the development of property as an asset class and is confirmation that the property fund management industry is responding to investor needs.