Agent Provocateur: Is a REIT a good option for landlords who might be thinking of selling?

Landlords face unprecedented pressures, seemingly politically induced.

Section 24 Tax changes, although announced as part of the 2015 Finance Act, are now biting, and when added to Minimum Energy Efficiency Standards, ie EPC minimum E, have anecdotally led to as many as 50% of landlords considering giving up and selling.

Agents face losing loyal landlords, with whom many have had a valuable long-term relationship. Perhaps hoping for a fee from the asset sale is the best that can be salvaged.

However, there is an option that maybe landlords should consider: selling their properties in exchange for shares to a REIT – a Real Estate Investment Trust.

A REIT is a highly regulated company that owns and manages a portfolio of properties. It enables shareholders to invest in property without directly owning or, if they wish, managing the properties themselves.

There are obvious benefits for landlords, mainly that 90% of annual rental profits must be distributed to shareholders.

There are also various tax benefits, which an authorised financial adviser can talk landlords through.

A new buy-to-let REIT has been set up and seeded with their own property portfolio by the Tennant family, headed by Peter Tennant who ran Ruck and Ruck in South Kensington for many years.

Theirs is a very expensive commitment but one they feel will offer other landlords a way to still see an income from their property assets and devolve responsibilities and concerns amid ever-tightening legislation.

Landlords can swap their properties for units in the REIT. Importantly, they or their agents can keep the management if preferred. Clearly, for agents facing a loss of revenue from landlords, this has to be good news.

The other good news about this particular REIT is that the owners will pay an agent a referral fee if one of their landlords is successfully introduced.

Currently, the REIT holds 31 properties in London and Kent worth a total of £9.2m. However, the Tennants are looking for many more landlords – ideally with properties outside London where properties have better yields – to add to the REIT’s portfolio. Their aim is to raise the overall value of the properties to £100m.

My personal view is that it is certainly something worth thinking about. However, it is clearly important that landlords take their own specialist financial advice and explore all the options carefully.

www.somersetestatesreit.co.uk

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2 Comments

  1. P-Daddy

    Firstly Ed, you share a worthwhile view to broaden the discussion on other ways to gain an exposure to buy to let market. Please can you disclose your involvement in this company as a Director, it is omitted from your article?! It is important that all understand you have a vested interest not only as a commentator; you are privy to inside information especially as the 2017 return discloses £8.87m of investment property which is now £9.2m according to this article.

    REITS are not very well understood by many, however the concept deals with the inherent problem with property as an investment grade asset. If you want out, it takes a long time to sell! There are tax planning advantages but the biggest is that if you need to sell, you can literally sell your shares at a price. Most REIT are based on commercial portfolios with large rental incomes and of course the proceeds from property and asset sales. There are risks whether the fund is open or closed, as there is a set pool of money. Look what happened to many REITS after the Brexit referendum…many were frozen to allow for asset disposal and refinancing as there was a rush on the shares to sell in the big boys.

    Until the company has a large rent roll and liquidity through stock markets, it is a risky strategy. I would like to see residential REIT take a larger share of the market, but residential only will need investors who have low gearing (small mortgages) to withstand the potentially small dividends in the early years. Wealthy individuals may like the punt whilst their portfolios are looking at lower returns. These may not cover outgoings, although if you have voids, a larger portfolio will take out the peaks and troughs. To work, this has to get larger very quickly. It helps to have estate agents banging the drums, it helps to have someone putting their own portfolio in as a seed, but as I say, size really does matter.

    I nearly invested in a similar company over 10 years ago, called Mill Residential REIT. Similar background as it evolved from a property company and developer. They launched onto the junior stock market, but have since de-listed as it struggled. The issues were as highlighted above. I bought into a mixed REIT NewRiver Retail which had a much heavier commercial bias as I worried about the residential only story, but one that was aimed at the blood and guts end of the commercial property market rather than the glamour stocks with exposure to the Square Mile and international office schemes etc. It has been a good steady prospect just not very sexy. It is now more exciting due to the size of the portfolio valued at £1.3bn with growing dividends; it was £600m when I first bought in. Dear readers, if there are any as I say this is not a very well understood sector of the property world, it gives an indicator as to the numbers at stake.

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  2. Ed Mead

    Thanks P-Daddy – perfectly good point and given obvious nature of my involvement at the web address didn’t consider the issue till you raised it. My involvement has purely been for advice and do think it’s a viable alternative – appreciate your input, good advice. Ed

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