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  • Buy-to-Let

    REITS - Real Estate Investment Trusts

    Hi James,

    I agree that yields are better in the North than in London and the SE, however, we are achieving 6% yields on our portfolio in Thanet. The central London parts of our portfolio do drag our yield down, which is why we are looking to sell a flat we have in Kensington and reinvest the proceeds outside of London. As I am sure you are aware one of the necessary skills of successful property investment is to identify great locations to invest in and to quickly learn about new areas. I feel the Board has a proven track record in this regard.

    We will asses every potential portfolio on its own merits. It may be a case that with a little work the yield can be increased.

    Not trying to avoid the query, but it is very hard to judge the actual net profits for shareholders without knowing more detail. However, Head Office costs will be taken out of the 10% of allowable retained profits and being a larger company will allow us to take advantage of economies of scale in order to keep management and maintenance fees as low as possible (whilst still maintaining high standards). In addition, you do not take into account the impact Section 24 tax changes will have on a landlords income.

    Yes, we are on TISE, but are under UK (HMRC) jurisdiction and are not an offshore company. In order to be a REIT the company must be in a recognised (by HMRC) stock exchange, TISE is recognised, however, AIM is not. Therefore, we decided to initially list on TISE with the aim of moving to the Specialist Fund Segment (formally Market) of the London Stock Exchange.

    The fund is currently around £9.25million. The share price is £1 a share. 99.5% of the shares are owned by the Tennant family and none have been traded whilst we have been a REIT. As I said in my previous post we are not looking to cash in and make a quick profit, we put all our properties into the REIT and are in this for the long run. We fully believe that we will offer landlords one of the only ways to maintain a property income once the Section 24 tax changes are fully implemented. Our the aim is to become the largest residential REIT in the UK and provide our shareholders with a great return on their investment.

    All the best,

    Tom

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    Somerset Estates REIT PLC

    The Residential Buy to Let REIT

    http://www.somersetestatesreit.co.uk


    The more I look into REIT's, the more I am finding them a very attractive option! Smile

    Interested to hear of what others think the pitfalls could be, apart from shares being illiquid?

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    I'm also attracted by the idea Vanessa.  I think the positives of it are that you get rid of all the business running side of the properties but the downside is you would also certainly get a lower return than from self management.  On this basis is there really any benefit above just using a letting agent and maintaining ownership in own name?

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    With the REIT your are exempt from S.24.

    This is not the case if you use a letting agent and the properties are in your personal name.

    Letting Agents  dont normally take full responsibiity for your properties.

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    what management fees are you being effectively charged on the REIT structure, can the management set their own salaries for example? plenty of small cap businesses are run as lifestyle businesses for the directors on markets such as AIM.

    Can management dilute your holding by offering a cash placing at a significantly discounted price? They might wish to raise cash to purchase a really good opportunity but in order to do so need to do a placing at a 25% discount to market. New shareholders will typically just sit there and sell stock until it hits the placing price. Then sell any uptick. Fine if its a massive FTSE250 reit like BBOX where there is enough institutional investors so that the discount is only 1 or 2% but on a smaller REIT listed on a non standard market expect the discount to be very large.

    in terms of being illiquid its a big issue in terms of your valuation.

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    Pitfalls would be lack of track record to assess yields and actual pay out.

    The distributable profit can be reduced by for example including high depreciation charges in the accounts to reduce distributable profits.

    If the above was ok the REIT is a very attractive option

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    It is interesting to see a live session of due diligence, James asked question I would not have thought of.

    I go for the worked example, from the above I think if put in a 200K property on which I had a 100K mortgage, I would get 97K shares and the REIT would add 100K to its loan facility, is that right?

    Would you keep the same tenant, I know we are supposed to heartless money grabbing b's, but I still don't like kicking out good tenants for S24?

    How do you protect the portfolio from having bad property offloaded into it, you say 2-3% discount, but surely somehow you have to account for the current yield, low yield greater discount (this assumes property valuation is strictly bricks'n'mortar)?

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    After considering the pro's and cons I have decided this wouldn't work for me.  Whilst I like the tax advantages and lack of hassle with a REIT it makes more sense to buy into an established REIT that is far more liquid and has a good diversity spread with various property classes than to put existing property into a fairly illiquid REIT.

    I prefer to have control over my own portfolio and then if I decide to sell some off at various stages or put under management it is easily arranged.

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    Good luck to SREIT, it might be good for some people, and maybe for me later on but not for now because:

    1. We came in to property because we wanted to control our own future

    2. We believe by self managing we can make significant savings

    3. If a trust says it buys its properties from landlords at only a 3% discount then they are not good buyers! We hope to buy at a MUCH better discount than that ourselves.

    4. Our BTL properties are a large proportion of our total wealth, I wouldn't want to invest such a large %age of our total wealth in any one thing, however well it is doing, regardless of weather it is a trust, Microsoft, Marks & Spencer (!) etc, anything can run into problems, but you notice that quicker if you are hands on.

    Will be very interested in what other people think.

    Dom

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    What HMRC give HMRC take away.

    At first glance REITs pay no tax grabs your attention but on closer investigation the dividends paid are taxed at the investor's income tax rates. Whereas, in a limited company,  after paying Corporation tax the shareholders can draw dividends at reduced tax rates.They can also make large contributions to their pension funds.

    So after considering only 90% of the REIT profit is distributed and the tax/pension situation it's more than likely the limited company route is the better way, and of course, you still have full control.

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