Nearly two thirds (63%) of IFAs expect to see an increased investment into real estate security funds this year as a result of the introduction of REITs in the UK. Of those anticipating an increase in investment, over a third expect this to be redirected from UK equity and direct property funds according to the research.
However, most IFAs feel as though they need more education on the REITs structure and its impact on the investment market to enable them to offer comprehensive advice to retail investors. Advisers in the South West and North East of England feel the least confident, with 71% of IFAs in both regions believing they don’t know enough about REITs. The need for continued education as REITs develop in the UK will be important to ensure that investors are aware of the pros and cons of investment and are able to make a considered investment decision.
Looking at the drivers for take up of investment in REITs this year, tax efficiency is by far the greatest attraction for advisers, with 31% seeing this as the greatest benefit for investors. REITs offer significant advantages to property shares in terms of tax treatment and essentially removing the double tax of corporation tax paid by the company and tax paid by the investor on dividends and capital gains. After taxation, IFAs consider the main benefits to be portfolio diversification (16%) and attractive yields (13%).
Funds investing in REITs are expected to be the main way in which retail investors will access the REIT market, with IFAs expecting 79% to invest via REIT-type funds as opposed to investing directly in REITs on the stock market. SWIP manages three funds which offer access to the UK REIT market: the SWIP UK Real Estate Fund, SWIP Multi Manager Global Real Estate Securities fund and the SWIP European Real Estate Fund, which is managed by head of European Equities, Nigel Bolton and achieved returns of 45.03% in 2006.
Ian Hally, investment director, Real Estate Securities at SWIP, commented: “It is encouraging to see so much interest and enthusiasm for UK REITs among IFAs but the research also highlights the importance of education in the success of REIT investment in the UK. Investors need to understand what REITs are, what the benefits are and what they can expect in terms of performance. The beauty of REITs is that they offer a liquid, tax efficient means of investing in the real estate market. The introduction of UK REITs is a significant step for the UK investment market and puts the UK on a level playing field with countries such as the US, Australia and Japan which have had REIT structures in place for several years.”
Nigel Bolton, head of European Equities at SWIP, commented: "I believe we are witnessing the creation of a new asset class for investors which over time will become a significant part of portfolio asset allocation decisions. REIT's should be regarded as long term investments and investors should not expect the very strong returns of the last year to be repeated on a regular basis. Over the long term REIT's should provide a total return between direct bricks and mortar and equities with volatility at a similar level. The UK REIT sector is likely to grow over the next few years with new companies offering different strategies and investment options with yield likely to become a much more important factor. Over the longer term I also think we will see a move towards a Pan European REIT structure. "
Dave Butler, programme coordinator for Reita (The REITs and Quoted Property Group), commented: “The research by SWIP is extremely encouraging at such an early stage following the launch of REITs in the UK and it is clear that the majority of IFAs recognise the benefits of having a tax-efficient means of accessing the listed property market. At Reita, we have seen the number of visitors to our website (www.reita.org) more than double since the start of the year and it is clear that, while the market is aware of some of the benefits, there is still a thirst for knowledge. Advisor education is at the heart of Reita’s mission and we will continue to work with our members such as SWIP to provide information, support and resources required by the industry.”
