Property Based Investments Flashcards
List 5 property based investments
Shares in listed property companies
Property unit trust and investment trust
Property authorised investment funds (PAIFs)
Insurance company property funds
Offshore property companies
Shares in listed property companies - benefits and drawbacks
More liquid than direct investment
Investment diversified over number of properties
Can be highly geared
Prices affected by qualify of management and borrowing levels
Describe property unit trust and investment trust
Unit trust:
- Invest in shares of property companies or invest directly
- Cannot borrow money as easily to invest
- Price linked to value of investments
Investment trusts:
- Invest primarily in shares of property companies and can only hold a small percentage in direct property
- Share price moves according to demand - independent of NAV
PAIFs - taxation
Elect for tax treatment to move point of taxation from fund to investor
Rental profits and other property related income is exempt from tax within the fund
Other taxable income is subject to corporation tax
Property income distribution (PID) paid net of 20% income tax
Interest paid gross
Dividends paid gross
Describe insurance company property funds
Direct holdings of commercial property
Cannot borrow money
Encashment can be suspended
Income and capital gains subject to up to 20% tax within fund
Offshore property companies
Can invest 100% directly in property (as opposed to property companies)
Not liable to UK corporation tax or tax on capital gains
Is liable to UK income tax on rental property within UK
To qualify as a REIT
UK resident
Closed ended
At least 75% profits and 75% total assets relate to ring fenced business
Interest / borrowings coverage at least 125%
At least 90% of profits paid out within 12 months
REIT taxation and investor taxation
REIT Taxation:
Ring fenced property letting business - exempt from corporation tax (90% of these profits must be distributed as dividends)
Other activities - subject to corporation tax
Investor taxation:
Ring fenced tax exempt element - treated as UK property income (paid net of 20% tax)
Non ring fenced element - taxed as any other dividend / investors pay tax depending on their tax position
Gains subject to CGT
Advantages and disadvantages of property funds?
Advantages:
Attractive absolute returns
Potential for high income / rental yields
Diversification
Low correlation with bonds and equities
Disadvantages:
Lack of liquidity
Volatility
Costs
