Real estate investment trusts (Reits) have been around since 2007 when nine companies converted to Reit status. Since then, the list has grown to more than 40 and there are more companies either planning to adopt the status through conversion of an existing company or by an initial public offering.
Reits are different from ordinary companies as they are more tax-efficient. Normally, a company pays corporation tax and investors are then taxed on dividends received. With a Reit, provided it distributes 90 per cent of the property income each year as dividends, it is exempt from paying corporation tax on the profits of its rental business. The one downside for shareholders is that dividends are taxed as income. Reits must be primarily engaged in property investment.
Conditions were improved in 2012 when the entry charge to become a Reit was abolished, while listing requirements were relaxed so that companies traded on London's Alternative Investment Market (Aim) could be included.
However, they are still exposed to all the factors that affect share price performances in the broader real estate market, and were hit just as hard when the referendum caused sufficient turmoil to put doubts on the real value of the assets held in property portfolios. But, by and large, investing in property generates the best return if a longer-term investment timescale is embraced.
Canny operators will also spot that, despite the current climate of uncertainty, there are certain subsectors of the property market that have more defensive characteristics. Private healthcare is a good example. With the number of people over 85 expected to double in the next 20 years, taxpayers' money is more efficiently used by providing for those unable to care for themselves with care home accommodation rather than blocking up hospital beds, where, apart from anything else, the cost of care is much higher.
One of the latest recruits to sign up for this is Impact Healthcare Reit, which plans to undertake an initial public offering on the London Stock Exchange with a view to issuing shares to raise £160m. This will go towards acquiring a portfolio of 58 residential care homes, offering 2,558 beds for £153m. The homes, where beds are occupied by private fee-paying and government-funded customers, will be leased to tenants for an initial term of 20 years with an option to extend for two further 10-year periods. This will generate annual rental income of £11.7m, with leases subject to annual uplifts tied to increases in the retail prices index, the higher of the two inflation indices. The attraction here is that it will receive rental payments starting from the day the shares are admitted, thus minimising cash drag. The company plans to pay dividends on a quarterly basis, with a yield of 6 per cent based on the offer price.
Another new entrant is LXI Reit, which plans to raise £200m to invest in commercial property assets let or pre-let on very long leases, typically with 20 to 30 years to expiry or the first break. Once again, the emphasis will be on generating secure rental income with a high degree of earnings visibility afforded by the length of the leases. Rent reviews will be linked directly to inflation, with a targeted net total shareholder return of 8 per cent or more per year. There will be no speculative development, and assets will be acquired in a diverse range of assets including affordable housing and student accommodation. Gearing - the amount of money the company can borrow - will be set at a relatively modest 30 per cent of its gross assets, with a maximum of 35 per cent.
