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Property Investment Funds (PIFs)

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What Impact will Property Investment Funds (PIFs) have on property prices and investment?

In April 2005 or shortly after, a UK form of the US style Real Estate Investment Trusts (REITs) will be launched called Property Investment Funds (PIFs) for residential property. This was first mooted in late 2003 by the Chancellor and much to most investors delight he confirmed the plan in the March 2004 Budget. A PIF will allow individuals to sell their properties into the fund to reduce capital gains tax and inheritance tax liabilities, though the income/dividend stream will be taxed as appropriate.

The Government Treasury is designing PIFs in part to stimulate investment in residential properties probably to increase housing supply. They also see them as valuable contributors to private and company pension schemes to allow sustainable retirement and possibly to stimulate pension savings and investment. A form of PIF has been available for UK commercial property investment to date. They are also available in France for residential property.

It is uncertain what conditions will be attached to residential property PIFs – for example, the maximum gearing available. Gearing of 50% (or less), which has so far been mooted, will be viewed as disappointing by many investors since traditional individual property investment allows gearing up to a maximum of 85%. Anything over 65% would probably be deemed attractive.

How dividends are distributed and how much can be taken out of the PIF at a given time are other important considerations being finalised in the next year. If the regulations and conditions are favourable, there could be a huge influx of private and company funding into such residential (and commercial) property investment from April 2005 onwards.

In essence, many individuals may choose to use PIFs as a form of retirement fund – many companies may choose to weight their pension funds with UK residential property using PIFs. Much net capital worth may be transferred into property investment purposes to reduce tax liabilities and create a longer-term income stream for families and companies. This could lead to further property price increases as capital flows and investment increase.

Consultation is ongoing by the Government – it is viewed as an attractive positive move by banks, building societies, property investors and analysts. The key issues yet to be ironed out of requirements to hold housing stock, a levy of 4% on share trades and flexible leases are all potential deal breakers.

Another concern is a conversion charge to roll property into a PIF – if this is high this will discourage use of PIFs and investment. Most companies would prefer any conversion charge to be made on asset value rather than capital gains. PIFs would have to be more attractive than existing property investment structures, otherwise the concept is likely to fail.

A potential downside for the Government is that many property companies and private investors are waiting to see what PIFs look like before deciding to move their companies or individual residence offshore / abroad. In an increasingly global and competitive property market – this is a concrete option for many wealthy individuals and companies. Clearly PIFs will fail as a popular and successful investment vehicle if the structure and details are not right. That said, most experts have faith that the Government will design attractives structures, so stimulating investment in new residential housing and regeneration of existing stock.

So the effect will be anything from neutral if the conditions are not attractive, to very positive if the conditions are attractive (e.g. if low tax burden, high gearing, low costs, flexible portfolio management is allowed). The potential for a positive impact on house prices is another reason why UK residential property investment looks attractive. Check for the latest news on PIFs through 2004, as things evolve and become more concrete.

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