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PROPERTY INVESTMENT FUNDSThis article is from the ePolitix Web site.Liz Peace - chief executive of the British Property Federation British Property Federation Question: What are property investment funds (PIFs)? Liz Peace: A property investment fund has lots of different names in lots of jurisdictions around the world; they are known as Real Estate Investment Trusts in America, or Listed Property Trusts in Australia. It is basically a collective investment vehicle. You create a fund, put a lot of property into it and then individuals, retailers, pension funds – anybody – can buy shares in that fund. It allows you to own a slice of property without actually having to own the property itself. You or I couldn’t afford to go out and buy Bluewater but we could afford to go out and buy a share of it. The advantage of a PIF is that it needs to be tax transparent, so you don’t tax the entity in the way that a company is taxed but the money that a PIF makes from the investment in property flows through to the end investor, who then pays tax according to his or hers personal circumstances. This makes it a tax efficient option. In a nutshell, it is a tax efficient way for the man on the street, pension funds and other institutions to invest in property. Question: What did Treasury consultation say about PIFs? Liz Peace: The property industry has been trying to persuade the government for a number of years that setting up PIFs in the UK would be advantageous for the UK and the industry. The property industry itself has something of a problem because it has been shrinking and shrinking, partly because of the inefficiency of investing in property companies and partly because of the double taxation. So the property industry has been saying; look, if you want a vibrant quoted property sector, you need a tax transparent vehicle like a number of these other jurisdictions have got. I personally picked this up a couple of years ago when I joined the British Property Federation, and we have been gently pressing away at bits of government. Finally after 18 months, it paid off, and the consultation document was published. From our perspective, this was a very good document because it asked a series of questions, which is the best way of doing a consultation rather than deciding what to do and asking the industry whether they like it or not. The consultation said there is a range of ways we can do this and asked us several questions; such as how do you think these funds should be established? How flexible should they be? How should they be managed? Can you tell us more about the benefits that would accrue? And so on. It is an excellent consultation document. Question: Why is there so much confidence in investing in commercial property - is this a valid view? Liz Peace: The problem at the moment is that the government wants to encourage saving and investment for lots of reasons. We have all heard about the pensions crisis, where suddenly lots of people saw their savings worth a lot less. People became very nervous about where to invest. Property has always been a sort of hidden asset - people have tended not to really notice it. It has performed better than any other asset class over the last ten years. Property tends not to have the highs of equities but then it doesn’t have the lows either so you get a degree of consistency. This makes it a good asset to put your money into. People who own a house would agree with this, but if you want to get into other property there are only a certain number of ways to do it. At the moment you can buy listed property company shares, but you would then suffer from double taxation. Alternatively, you can invest in residential or commercial property though the buy-to-let market which of course is hugely risky because you are piling all your assets into one property. You could go out to buy a shop in the high street that’s let to somebody and you would get an income from that but what if that particular high street suddenly lost its cache and nobody wanted to be there anymore? Your asset wouldn’t be worth very much, whereas if you can buy a share in a fund that has a spread of properties, it spreads your risk. Property is a great investment but there are dangers in doing it through PLCs or directly, which is why a Property Investment Fund, which puts a selection of properties together and spreads the risk, is a good way of people benefiting from this highly productive asset. Question: If it is such a great option why don’t more people invest? Are the risks associated with this form of investment too high? Liz Peace: At the moment we don’t have PIFs. The other opportunities for getting into property are available but not well known and they aren’t tax efficient. Frankly, I don’t think the industry has done a hugely good job of selling itself, although that is partly because it never felt it has a product that it could sell very well to people. If we had PIFs then I think the industry could sell itself to retail investors. In Australia Listed Property Trusts are the equivalent of PIFs – 40 per cent of them are owned by the man in the street. If you actually looked at somewhere like Sydney, probably 70 per cent of the Sydney skyline is actually owned by ordinary people, because they have shares in PIFs or their pensions have got shares in these property funds. Question: In your view, would you recommend people invest in property rather than a pension especially in light of the so-called pensions crisis we are in the middle of? Liz Peace: Well, I think there are a couple of different ways at looking at this. Clearly I wouldn’t recommend people to invest in anything I say because I am not a qualified financial advisor. People need to have a decent pension fund and I think they should be putting pressure on their pension funds to invest more in property. But pension funds are perfectly capable of going out and investing in property; they can do it now and they can do it in more sophisticated ways than the man in the street can because they can get involved in off shore vehicles. However even then, those pensions funds still have a very small amount of their assets in property, seven to eight per cent usually. Investors should be saying to their pensions funds why aren’t you going into property? People also tend to save a lot more than just their pension fund, so for instance if people want to find a good way of investing their annual ISA allocation of £7,000, most banks would offer you an equity ISA. But look what has happened to equities - it is quite a depressing option actually. If you could put your ISA easily into property, I think people would see the benefit of it. It is quite difficult to find a property vehicle to invest in at the moment, there are some very specialised ones, but they are difficult to find and difficult to understand. It is not a common investment medium but I think we need to change this. Question: What expectations do you have for investment in property in the future? Liz Peace: First of all, we have got to get through the hurdle of persuading the government to introduce PIFs in the right fashion. We have been hugely pleased with the discussions we have had with the Treasury so far; they have listened and they have been very encouraging. But I have been a civil servant for a long time and I have also worked in this industry now for two and a half years, and I know that you rarely get everything you want from the government. I think our first challenge is to try and ensure that we achieve as good an outcome from this consultation as possible and that the government for all the best reasons don’t impose too much regulation and too much restriction which would make this property investment fund weak. They need to leave enough space to allow this to succeed. I think if we get that, the whole shape of the property industry will change significantly in that we will get more equity investment in property, less debt, and we will get more retail investment in property. I think this is actually going to be a good thing and will lead to better finance for the built environment and it will lead to a better medium for investment for pension funds and the man in the street. Question: Do you think you have enough support from the government? Liz Peace: I think the fact that the government have produced the consultation document they have is most impressive - and it would suggest that their thinking is developing on the right lines. As always, the government sees it as its job to look at all the possibilities that could go wrong and to regulate for them, and if you are not careful you can regulate things out of existence. It is up to us to try and persuade the government that they can achieve what they need to achieve so that they can protect investors with an efficient and light regulatory touch. |