Copyright: David Lawson 1996
A fog swirls around property securitisation. Touted as the single biggest factor which could save the sector from slow death by investment starvation, it still leaves even financial specialists confused over ideas that loom out of the mist and fade back into obscurity. But two beacons have drifted into view which may provide a clearer passage. The Stock Exchange is about to issue new guidelines opening the way to a new kind of listed property unit trust. Meanwhile, the Investment Property Forum has come up with figures which could break through the Treasury's long-standing opposition.
These two institutions have blocked securitisation for decades. The Exchange forbid investment vehicles liquid enough to suite fund managers. The Treasury has desperately fought schemes which might cut tax flows. Dik Dusseldorp, chairman of investment manager Dusco, has spent six months breaking through the first barrier. While the Stock Exchange helps generate more fog by refusing to admit any impending change, Dusco is confident that rule revisions will open the way for a new kind of listed property trust - perhaps this year.
Tim Simon, chairman of the Investment Property Forum, is hoping for a similar timescale in its battle for a different kind of vehicle, similar to Real Estate Investment Trusts worth 45bn dollars (29m pounds) in the US. Early results from a computer study by Piers Venmore-Rowland of the City Business School show that altering the rules to ensure investors do not face double taxation might even raise revenue.
'Turnover of securitised property would be between 30% and 50% a year compared with direct property investment running at around 6%,' says Philip Rose, an executive manager at Lend Lease who has had a major input to the IPF campaign. 'That means the government would collect between five and eight times more stamp duty. It would also not have to wait so long for capital gains taxes.'
The argument is not new. A series of unitised vehicles were proposed in the Eighties with similar claims. 'We failed in the past for lack of evidence that this would not harm tax income,' says Simon. 'This time we have the figures.' Dusco is using different ammunition, however. Perhaps reflecting Dusseldorp's wide experience of listed property trusts in other countries, the group is impatient to launch in this country.
'We already have experience with a limited partnership scheme involving 12 major funds which has invested £200m in shopping centres,' says managing director Paul Oliver. 'After talking to them, we agree with the IPF that the ideal next step is a REIT - but that would require a change in the law, so we are looking at other ways.' That involves launching a property unit trust which is structured to be tax neutral by distributing income rather than paying dividends. Heavy lobbying of the Stock Exchange to alter its listing rules to allow such a vehicle could now pay off, with draft changes to the Yellow Book understood to be ready for consultation.
There is remarkably little friction between the two sides. 'Different products are emerging for different needs. But we see them as parallel courses to the same destination,' says Rose. That is a market where small pension funds take equities rather than sell out of property altogether, and larger ones maintain their overall stake because of the advantages of extra liquidity. 'Synthetic' vehicles are also evolving, such as Barclays' Property Income Certificates and the Real estate Index Market planned master-minded by John Whalley of AMP Asset Management.
'These have a different role, as they allow investors to bet on the market rather than an individual trust,' says Iain Reid, of BZW Property Management, who helped invent PICs. What kind of trusts that emerge remains blurred in the fog. The success of REITs in the US and similar recent developments in Belgium have brought these to the fore. They are what Simon calls an ideal - tax neutral, listed, closed-end (giving a defined price) and regulated. Dusco's plans are likely to be closer to conventional unit trusts.
Not everyone is cheering so wildly over the impending breakthoughs. 'We should be careful not to see listing as a panacea,' says Reid. Liquidity emerges not because property can be traded in shares but if investors want to trade them. Some managers are also irritated by the way existing trusts are being written off. 'I welcome anything that improves liquidity but listing is being seen as a Holy Grail,' says Robert Dismorr, investment manager of the £300m-strong Hill Samuel Property Unit Trust. 'We beat the IPD index and trusts like this are relatively liquid already. Investors can be out in three months - or less if dealing in the secondary market.'
Enthusiasm for new kinds of investment vehicles - and implied criticisms of the old - is unlikely to be dampened, however. The journey has been too long not to inspire wild cheering when a destination is in sight - even if that destination remains blurred by the fog.
Advantages Disadvantages
Property plc Tradeable shares Fully taxed
£14bn mkt cap Regulated Payout 70-90%
Closed-end Liquidity poor in
smaller co shares
Unit trust(unauthorised) Tax exempt Low liquidity
£4bn mkt cap Open-end Unlisted
Insurance/overseas
investors banned
Unit Trust(authorised) Listed Only 80% assets
£250m mkt cap Basic tax/no CGT in property
For individuals
Prop Inv Trusts CGT exempt Direct property
£200m mkt cap Listed holding limits
Corporation tax
Limited Partnership Tax exempt 20 partners only
REIT Internat liquidity Needs legal change
$45bn (US) Tax exempt