Donald Trump once quipped that to build your wealth and improve your business you need to know about real estate. I'd like to add a small footnote to Trump's astute observation: You also need to know when to buy and when not to touch property with a barge pole.
The time we should have given property a wide berth was in 2007. That was around the time when Real Estate Investment Trusts (REITs) were unleashed on unsuspecting investors. In fairness to REITs, though, they were introduced as an attempt to level the playing field between direct investors in property and shareholders in quoted companies. The former, such as buy-to-let landlords, only had to pay tax on rental income once. However, the latter had to pay it twice - first through corporation tax and again through income tax on dividends.
Through the introduction of REITs, a qualifying property company can effectively avoid both capital gains tax on property disposals and also on rental income. To qualify, though, a property company must earn at least 75% of its gross income from rentals and it must distribute 90% of the rental profits as dividends.
However, the introduction of REITs created an unnecessary hype that sucked in new investors who were attracted by the income potential of property. Problem was it also gave the property bubble of the noughties one final puff before it imploded spectacularly.
But things may be about to change for the better. According to a report by property agent Drivers Jonas Deloitte, London property prices are set to climb as a result of a shortage of new office space. The report pointed out that only 474,000 square feet of new office space was completed last year in London's West End. This was the lowest completion for nearly ten years. A few miles up the road in the City, around 443,000 square feet of new office space is expected to come on stream this year.
The dearth of new office space coupled with higher demand as the UK economy recovers could give property developers a much-needed fillip. A scramble for prime London offices could also send ripples out to regional cities as tenants seek out cheaper alternatives. It could also provide a timely opportunity for investors to dip their toes into the property sector again.
Investors interested in some exposure to UK property can do so by trawling through quoted REITs. An easier way may be to invest through an Exchange Traded Fund such as iShares FTSE EPRA/NAREIT UK Property Fund. This fund is weighted by market value, which means it holds a huge slug of Land Securities and British Land in its portfolio and a swathe of other property companies.
David Kuo is director of financial advice site fool.co.uk
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