Investment extra: The REIT move

DURING bad times, a vision of a brighter future is just what you need to lift the spirits. The film Seabiscuit tells how a gallant racehorse gave heart to a depression-hit America.

Property companies are beginning to believe in their own Seabiscuit. It is called REIT - the real estate investment trust. They hope it will carry them to riches.

They could do with help. The City of London is littered with office space that emptied out during the bear market. Times are hard.

So the vision of REITs is welcome. As investment trusts, they would be exempt from income and capital gains tax, so long as they paid out most of their income in dividends.

The snag is that they do not exist in Britain - yet. Property gains are taxed twice - the company pays corporation tax and shareholders pay again on their dividends.

Between the companies and a tax-free future stands Chancellor Gordon Brown, who is unlikely to hand out Christmas goodies to a bunch of rich landlords.

Even so, change is in the air. REITs are popping up all over - the US, France, Germany, Luxembourg and Ireland have allowed them. These can trade property here at an advantage.

UK investors are setting up offshore property unit trusts. Revenue is starting to leak away. There are signs that the Treasury is taking this on board.

In 2000 it wrote off REITs as a 'tax losing measure'. But 2003 Budget papers welcomed 'the opportunity to consider the tax treatment of commercial property'. Civil servants are visiting other countries to see how REITs work (a nice trip to France on expenses).

There is one compelling reason for Brown to change his mind - he could make billions. Converting to a REIT is a perk for which firms will pay. France allowed the change if they paid tax - at half the normal gains rate and spread over four years - on their unrealised capital gains.

That could mean big money. Nan Rogers at Bridgewell Securities puts it at £1.2bn from the 20 property groups she analyses.

In total, Brown could collect much more. David Melhuish, at the Royal Institution of Chartered Surveyors, says directly-owned property in Britain comes to £480bn.

Much of this is seldom traded. Introducing REITs could free property that has been tied up for decades. Over five years, the taxman could rake in £4bn to £5bn.

With a Budget deficit topping £30bn, this could be a nice little earner for Brown. He could present it as improving the flexibility of the property market - not a tax at all, really, more a favour.

For once, that would be true. After the initial pain, property companies would be transformed. Nan Rogers reckons dividends at several would more than double. At Hammerson and British Land, they could rise by 40%.

Much depends on how Brown moves. The industry is looking beyond his Pre-Budget Report to the 2004 Budget. Doing nothing does not look a good option. Experts see REITs by 2005/6.

That partly explains the bids at Canary Wharf and Chelsfield, and improves the outlook for all property stocks.

Hammerson has £4bn assets. Merrill Lynch says 'quality retail portfolio, development potential, management strength'. The shares have risen to 616 3/4p 22% below Bridgewell's asset value of 787p. If it turns into a REIT, the 2.9% dividend yield could top 4%. That would really take the biscuit.