The Investment Column: The Reits stuff... Slough Estates has what it takes to go higher

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The Independent Online

Shares in the property sector were set alight yesterday as Gordon Brown revised his plans for the introduction of Real Estate Investment Trusts (Reits). Slough Estates, which posted solid full year results, saw its stock register one of the biggest gains in the sector, up 13 per cent to 685p.

So why all the excitement? Quite simply, if a property company turns itself into a Reit it no longer has to pay corporation tax. This means more profit for its shareholders. Yesterday, the Chancellor indicated that his plans to introduce Reits in 2007 are right on track. He got applause from investors by setting the conversion charge companies have to pay to qualify for the new status at 2 per cent of their assets - in line with industry expectations.

Mr Brown relaxed the rules governing the gearing of Reits - that is how many times their profits must cover interest payments. He also offered greater flexibility for companies operating in the new regime by allowing them to pay out 90 per cent of profits to investors as opposed to the 95 per cent mooted originally.

The key result from Mr Brown's amendments is that Slough, along with all of its UK-listed property peers, will now qualify to become Reits. As for Slough's results, they beat expectations, reflecting a better than expected performance from the group's UK and US portfolio. The shares have underperformed the sector recently so it was no surprise to see them do so well on the back of the Chancellor's news. In the short term they are likely to come under pressure. On a longer-term view they will go higher. Buy.

F&C Asset Mgt

F&C Asset Management has had a rough couple of years, struggling to keep its head above water ever since its reverse takeover by Isis in the summer of 2004. Having lost a number of mandates in the wake of the merger, things went from bad to worse last year when - through no fault of its own - it lost the contract to manage £25bn of Resolution Life's assets.

Meanwhile, the group has continued to suffer from poor investment performance - with only around a third of its funds outperforming their sector averages over the past five years, and just over a half outperforming their sectors in 2005. Although F&C's retail funds are now growing - with net sales up some 21 per cent last year - fund inflows continue to be a long way behind the growth in the market as a whole. Furthermore, its institutional business continues to lose mandates faster than it is winning them.

All eyes are now on new chief executive Alain Grisay, who has a tough turnaround job ahead of him. Announcing full year results yesterday, the new CEO was quick to admit that the company still faced considerable risks over the coming year, but reassured investors that plans to put the company on the road to recovery were already well under way.

Fund management teams have been improved, the group has finally turned its focus to organic rather than acquisitive growth, and changes are being made in its institutional division to cater for new demands. The next 12 months will be crucial. Investors should wait for more clarity on how the reforms at F&C are going before rushing out to buy the shares.

Evolution Group

2005 was not an easy year for Evolution Group. The stock broker was hit by a deluge of bad publicity surrounding cash it raised for a number of companies - the most controversial among them being Regal Petroleum, the oil explorer. However, going by the group's results yesterday, it has come through it all rather well.

Evolution posted a 30 per cent rise in annual pre-tax profits to £30m. The broker also boasted of a 36 per cent rise, to £864m, in the amount of money it raised for clients during the course of the year.

One of the most interesting aspects of yesterday's results was the performance of the group's Chinese broking business, Evolution Securities China Ltd, where revenues jumped from £400,000 in 2004 to £2.1m. The operation was set up in late 2003 to cash in on the fast-growing number of Chinese companies looking to raise equity funding in Hong Kong and London.

Alex Snow, Evolution Group's chief executive, expects plenty more growth from this unit in the year ahead.

The broker has promised more share buybacks over the coming months. It retains £138m of cash on its balance sheet to fund this. Acquisitions are another possible use for the money.

But acquisitions are a risky business and can quickly destroy value when they go wrong. Given that Evolution shares have soared by more than 370 per cent since March 2003, now is a good time for investors to take profits.

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