They are property investment vehicles that offer investors returns that are broadly the same as those gained from investing directly in the underlying asset. This return is achieved by having a listed vehicle that is tax efficient – that is, it pays no tax at a corporate level, but is required to distribute a high level of income and capital to investors, on which tax is then levied.
Why do we need them?
By having large, well-managed investment vehicles offering returns that are virtually the same as direct investment, it is hoped that the risks of direct investment by lots of single investors can be ameliorated. There are many individuals who would like exposure to the residential sector but who only have limited amounts of equity. PIFs could raise significant sums for investment in a more structured manner. Other objectives for PIFs are to:
- improve the quality and quantity of finance for investment in property in a manner that promotes economic stability and market flexibility, and increases the supply of property
- expand access to a wider range of savings products on a stable and well regulated basis
- ensure a fair level of taxation from the property sector and reduce tax avoidance
- support structural change in property markets to the benefit of end users.
What happens next to the Treasury proposal?
There is a three-month consultation process that will seek to answer 19 questions about PIFs. These relate mainly to how PIFs are structured, managed and run, their tax position, and how existing companies and funds can convert to a PIF.
What has this got to do with housebuilding?
The first question in the consultation asks "to what extent would a PIF… encourage greater investment and stimulate new development in the residential sector?" It is for the industry to answer this and propose a structure that would help support the growth of housing output and lead to an expanded private rental sector.
So where would the residential property for a fund come from?
There are two schools of thought on this. The first is that development by PIFs would be heavily restricted so that they could only own houses once someone else had developed them. This is all well and good in commercial property markets, but the residential market is not so straightforward, as there are a range of end buyers for housing. Also, to date, speculative residential developers have been reluctant to sell to investors, because they tend to require a discount to open market value. The second school of thought is that there is a strong case for letting PIFs develop their own stock. The main advantage of that is that it would enable bespoke rental stock to be developed.
Would people want to invest in a residential property fund?
Private individuals have been happy to invest directly using buy-to-let finance. This group has become by far the biggest players in the market, investing more than £40bn over the past seven years. But while some investment funds have been created in recent years, none has been set up to meet demand from private investors looking for indirect investment opportunities. Funds offering institutions indirect exposure to residential property therefore have portfolios worth less than £1bn.
Hasn't the government tried to stimulate investment in the private rental sector before with Housing Investment Trusts?
Yes. This is a well-trodden path and a useful benchmark for how not to approach PIFs. HIT legislation enacted in the mid-1990s failed because there was too much prescription and regulation and it stifled potential investment.
What issues need to be dealt with in getting PIFs to work?
There will be a need for any PIF structure, and key personnel, to pass the due diligence tests and rules to be able to list on the stock exchange. Opinion seems to be that assets of more than £200m are needed to ensure a cost-effective listing, although some listed property companies have asset values at a much lower level than this. It will be a challenge to make the structure of PIFs work for residential and commercial property. The crucial issues for residential property are: the type of allowable investment, the ability of a PIF to develop housing and the valuation of the investment.
This article is extracted from a piece included in the latest issue of The Residential Property Focus, published quarterly by FPDSavills. To find out more about Focus, contact firstname.lastname@example.org.