Comment: Trust offers potential in property

Bill Jamieson
Bill Jamieson
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One of the few areas where rival political groups can find some agreement is the need for more housing. In today’s column I focus on two points of entry for retail investors: first, an innovative new investment trust specialising in the buy-to-let sector; and second, exposure to housebuilders.

This month, property investment specialist Mill Group launched the UK’s first mainstream residential real estate investment trust (REIT). Investors keen to gain exposure to the buy-to-let market without taking on the full cost of a property now have a highly tax-efficient chance to do so.

It has a number of attractive features. The company holds a portfolio of residential properties and, as an REIT, would pay no tax on its core rental income or capital gains.

The trust has to pay out at least 90 per cent of its income, so it is attractive for income-seekers. Rents tend to rise in line with average earnings, thus providing some element of “inflation proofing”.

Existing buy-to-let investors can swap shares in their property company for those of the REIT and avoid capital gains tax – Mill Group will split the difference with them, so they get a higher net return and the REIT gets an immediate capital uplift. It also frees them from the hassle of managing the properties themselves.

Those saving for their first flat can now invest their deposit money in something that will keep pace with residential property instead of seeing property prices outstrip the interest they are receiving, putting home ownership ever further from their reach.

The REIT is launching with seed capital invested or committed from its managers of around £2 million and is making an initial £300,000 of equity available via SyndicateRoom. It will seek to grow by taking an opportunistic approach – acquiring companies with portfolios of good quality mainstream residential properties where REIT shares or REIT tax advantages can be used, individual rental properties to be developed, and build to hold developments. The minimum investment for those buying equity in the Mill Residential REIT via SyndicateRoom is just £1,000.

Previous UK REITs have mainly focused on commercial property, but Mill Residential REIT is the first to invest exclusively in the mainstream residential sector. Its initial portfolio is almost fully let and generating income, and consists of properties located in the REIT’s initial target locations of London, southern England and the Midlands and ranging in value from £180,000 to £430,000.

This is an innovative trust that will appeal to those seeking low-level entry into the buy-to-let sector and without the hassle of letting and managing a property directly.

There are caveats. This is a specialist investment. It would be vulnerable to property tax changes and may prove a volatile ride on future interest rate movements. And the highest yields – and, arguably, the greater capital ­return – may now be found outside London and the south-east.

Five points in favour of Britain’s housebuilders

Meanwhile, what of prospects for housebuilders? Policy support has been in place for some time through initiatives such as Help to Buy, changes to planning procedures and, of course, ultra-low interest rates.

But after an initial surge last year, the market appears to have slowed, with signs of a flattening in house prices (and falls in over-heated areas such as central London) and a slowing pace of mortgage lending. Adding to the malaise has been talk of an annual “mansion tax” on homes worth more than £2 million. So is the rally over?

Not so, argues Neil Harmon, fund manager at the Henderson Smaller Companies Investment Trust, citing five reasons for favouring the sector. First, parties are well sensitised to the issue of “housing crisis” and support is likely be extended and amplified in the run-up to the May election.

Total mortgage lending may have eased slightly but first-time buyer figures are looking healthy, helped by growing availability of higher loan-to-value mortgages.

Third, there has been a continuing squeeze on smaller developers – down from more than 12,000 in 1988 to fewer than 2,700 by the end of last year. This has worked to help the resilience – and the margins – of the larger builders.

Fourth, there is widespread acceptance of the need for more housing. Against an annual new homes target of 200,000 we have managed just 130,000. The problem is particularly acute in the “affordable homes” sector.

Finally, argues Harmon, the sector is underpinned by powerful economic drivers. Jobs growth is strong, GDP growth is robust and households hold lower levels of debt than they have in a long time. Furthermore, with food and oil prices low, consumer confidence is growing.

The Henderson Smaller Companies Trust has been interested in some of the larger housebuilders, investing in Bellway and Taylor Wimpey. Harmon said: “With strong management teams and economies of scale, valuations remain attractive on a number of metrics and they are handing back cash to shareholders where they can. Dividend yields are high and strong dividend growth appears set to continue.”

For these reasons, he believes there is more mileage yet in the sector.