Possible ban on Reit advice shocks investors

Property investors face uncertainty after it emerged the FSA’s crackdown on unregulated investments could include some Reits.

Last summer the FSA announced it was taking measures to stop advisers recommending esoteric and unregulated investments to their clients. But several months on it has emerged real estate investment trusts (Reits) could be caught by the watchdog’s net because they fall under the definition of unregulated collective investment schemes (Ucis).

Ian Sayers, director general of the Association of Investment Companies (AIC), criticised the FSA’s possible ban, saying it does not make sense and is not fair to the whole of the market. He said the regulator’s approach is “opaque” and it was believed any fund that holds investments that are not liquid or mainstream could be caught out by the Ucis ban.

Article continues after advert

The FSA confirmed Reits with certain legal structures could fall under the ban, even though the government created the tax-efficient structure, which gives companies tax advantages if they distribute 90 per cent of their income to shareholders, in 2007.

Adrian Lowcock, senior investment manager at Hargreaves Lansdown, said, while Reits are focused property firms listed on the stock exchange like any other company, they can be a lot riskier than expected.

He said, “Many Reits use borrowing to get a geared exposure and build a larger portfolio, which increases potential returns but adds risks, particularly if borrowing costs rise or loans are recalled. UK-listed Reits predominantly invest in UK property, although some have European exposure.”

However, Tony Yousefian, chief investment officer at OPM Fund Management, said Reits have proved to be strong performers in the past few years because they have undergone efficiency programmes.

He added that, while they offer the prospect of capital appreciation, they can carry equity risk and a level of volatility that needs to be taken into account when considering them for a portfolio.