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Commercial Property
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The private investor has a variety of indirect investment routes into commercial property. Few investors have the time or financial resources to invest directly in commercial property.
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Authorised unit trusts
Although the unit trust is an attractive and tax-efficient route to investment in commercial property, to date the regulatory requirements on size and liquidity have been a major factor in limiting the number of funds available. Very few authorised unit trusts in the UK invest directly into commercial property. Until recently Financial Conduct Authority (FCA) regulations required commercial property trusts to hold no more than 80% in bricks and mortar, with the balance invested in securities. Whilst this investment in securities and cash provides a measure of liquidity for investors, it can impact on the overall yield of the fund. It is now possible to offer a fund with the potential to invest a higher percentage directly in property. It is, however, unlikely that these funds will prove suitable for the typical retail investors who may require rapid access to their investment through regular dealing.
Property unit trusts cannot currently be held in ISAs and PEPs, although the government has proposed that the restriction is removed.
As with all investments, there are risks you should understand.
The value of investments may be affected by changing stock market conditions. The value of capital and income will fluctuate as property values and rental income rise and fall.
While property valuations are conducted by an independent expert, any such valuation is a matter of the valuer's opinion rather than fact.
Property investments may not always be readily saleable and very occasionally there may be constraints on cashing units.
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Life insurance company funds
Most major life insurance companies offer property funds as a link to their life and pensions products. Before property unit trusts appeared, life company property funds were the only route into commercial property investment for most private investors. Unlike unit trusts, life company funds are not constrained in the proportion of property that they can hold.
Life and pension policies linked to property funds have proved popular in recent years but the life funds do suffer a tax drawback compared with unit trusts. Within a life policy fund there is typically an internal capital gains tax charge. The unit trust has no internal capital gains tax although any gains on encashment are potentially liable to personal capital gains tax depending on the investor's personal tax position. Gains on single premium life policies are also subject to an income tax charge for higher rate taxpayers.
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Investment trusts
Until UK REITs appear, which is still subject to consultation and approval, it is not possible to offer an Inland Revenue authorised investment trust which invests primarily in commercial property. The property investment trusts that currently exist are mainly invested in property company shares.
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Property company shares
The UK stockmarket boasts a wide range of property companies, three of which – Liberty, Land Securities and British Land – are large enough to be members of the FTSE 100 Index.
For the private investor, property companies have two main drawbacks:
They are normally tax-inefficient. Capital gains and rental income are taxed within the company, usually at a rate of 30%.
Their performance tends to follow that of the stockmarket in general rather than the commercial property market. They are thus a much more volatile investment than a direct holding in property.
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Offshore companies
In the past couple of years, a number of investment managers have sought to sidestep the restrictions on UK authorised funds and investment trusts by setting up offshore companies – effectively unauthorised investment trusts. These companies have usually been given a UK stockmarket listing, which enables them to be included in ISAs and PEPs.
The tax consequences of the offshore structure are generally that it is free of any internal taxes, but is subject to UK income tax on rental income less expenses.
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Other investment vehicles
The appetite for UK property investment has prompted the creation of a number of other investment vehicles. These include limited liability partnerships, which can have high minimum investment levels. Offshore funds in a range of forms are also available, but their promotion within the UK is often restricted by FSA rules.
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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.
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