Types of Property Funds Flashcards
Who creates sector classifications for UK authorised property unit trusts, PAIFs and ETFs?
The Investment Association (IA)
What is UK Direct Property?
A fund that invests at least 70% of their assets directly in UK property.
This is an average over five year rolling periods.
What can cause a UK direct property fund to be removed from the sector?
<70% for 12 months
<60% in any month
What are the conditions to be classified as “Property Other”
70% invested in property but do not meet requirements for UK Direct.
e.g. <60% in a month
Property Unit Trusts can be either:
Authorised or Unauthorised
Similar to property mutual funds in other countries
What is the difference between an authorised and unauthorised property unit trust?
1) Authorised Designed for Retail Clients
2) Unauthorised designed for institutional investors only
3) Authorised get tax exemption
How are authorised property unit trusts taxed?
1) No CGT on capital gains
2) 20% tax on income (special rate of corporatino tax for Unit Trusts and OEICs)
What do offshore property unit trusts offer?
Greater flexibility
Tax effective for a greater range of investors.
No income / CGT - investor is taxed at their own nominal rates.
What is a Property Authorised Investment Fund (PAIF)
An open ended fund which invests in property
Many open ended property funds converted to PAIFs due to the tax efficient nature
What four conditions must be met to qualify as a PAIF?
1) Split income streams in three
2) Prevent corporate ownerership exceeding 10%
3) Must generate revenue through rental income
4) Must be structured as an OEIC
They must also notify HMRC they wish the PAIF regime to apply to the fund.
What is the tax treatment of a PAIF?
Property Investment Income = Exempt
Capital gains = Exempt
(withholding tax of 20% on income distribution)
Excessive debt or distributions to companies owning >10% of NAV incurs a special UK tax charge.
Why do PAIFs often have feeder funds?
To accomodate investors who cannot receive coupons gross.
What are the three income streams for a PAIF?
1) Property Income (e.g. rental income)
2) Interest Income (e.g. interest earned on property bonds or cash deposits)
3) Other income (e.g. any dividends)
What are the benefit of real estate ETFs?
1) No risk of manager selection
2) Liquidity (trade on stock exchanges)
3) Diversification
4) Invest in particular regions
What is a drawback of real estate ETFs?
1) No benefit of investmet funds (e.g out performance)
What are the two major indices which are tracked by ETFs?
1) NAREIT (national association of real estate investment trusts)
2) EPRA (European public real estate)
How does a REIT differ from other quoted propery companies?
No tax is incurred on income or gains.
Instead a tax liability arises on the shareholder at their nominal rate.
CGT may therefore arise or any CGT losses can be offset or carried forward
How much of a REITs taxable income has to be distributed each year to avoid CGT arising?
90% (to shareholders as dividends)
REITs are listed on the stock exchange. What is the major benefit of this.
And how does this contribute to the pricing?
The major benefit is the liquid nature of the shares making them easy to buy and sell.
Price is determined by supply / demand as opposed to the valuation of the underlyin.
As such REITs can trade at a premium or discount to their NAV.
In March 2023 the UK govt reformed tax rules regarding REITs what were the two changes.
What was the hoped outcome
1) Valuation for “recently signifcantly developed” properties will reflect value increases
2) Tax deductions from income changed
Wided scope of businesses able to operate as a REIT
What is a limited partnership (in regards to property investment)
- Unlisted Property Investment Vehicle
- General partner established investment (has unlimited liability)
- There are a number of limited partners (limited liability)
What are the key features of a limited partnership
1) Tax transparent (partners pay tax on gains and income)
2) Pre-determined investment life (assets disposed at end - unless partners vote to extend)
3) Majority are based in Jersey and Geurnsey
4) Limited partners cannot be involved in the decision making process (will lose limited liability)
There are 4 major factors that should considered when investing in property, what are they?
1) Potential property asset bubbles (e.g. Covid and GFC)
2) Liqiduity of listed vs investment funds
3) Level of gearing permitted (core, core plus & value add)
4) Redemption fees and notice periods (e.g. LTAFs 180 days)
What examples are there of property being affected by cyclicality / asset bubbles?
1) GFC
2) COVID
3) China debt crisis
4) American - high rates / long mortgages
