Pifs to perk up the property market

WHEN Gordon Brown sits down from the despatch box today the way investors approach commercial property will have changed forever. If, as expected, the Chancellor shakes up the vehicles within which property firms sit, the quoted property sector - once a forgotten corner of the British equity market - is set to be revived by the introduction of Property Investment Funds (Pifs).

The introduction of British Pifs is being heralded as a buy-to-let scheme for commercial property as bundles of buildings are put into one vehicle.

Some would argue that existing British property firms already work in this way. But Pifs will have a narrow focus, allowing investors to get much better returns than from traditional property firms.

The indications are that Pifs will prove attractive to investors. Real Estate Investment Trusts, the Pif equivalent, have spawned an industry in America that is worth more than £160bn. It has led to a resurgence in private investors returning to commercial property. And in Hong Kong the general public scrambled to become involved in the nation State's first public REIT, when they were launched last year.

Pifs can offer investors substantial benefits because the property firms will not have to pay company tax. This could be a big saving for firms such as Land Securities, which paid £84.8m in tax last year.

Pifs, like REITS, offer an array of advantages including higher dividends - often between 70%-90% of income - and a reduction in the often hefty discount to net assets included in property firms' share prices.

Shares in the British property market rose 40% last year, but still have further to go. This means companies like troubled Minerva often operate at huge discounts to their net asset value. Its market value is £430m against assets in excess of £1.2bn.

Of course, none of the Pif benefits will come for free. Speculators are divided on whether Brown will charge a fee based on assets or on capital gains tax liabilities for firms to transfer themselves to Pifs.

But for a company as big as Land Securities, the UK's largest quoted property firm, a 1% charge of net assets would be £66m. This would give a £18.8m saving in its first year as a Pif because it will not have to pay company tax.

A recent study by the Council of Mortgage Lenders suggests that more than half of Britain's 75 quoted property firms could take the Chancellor up on his new scheme.

Liz Peace, chief executive of the British Property Federation, says the figure could be higher but argues that it is all about cost. 'The Treasury has to be clear - this is a very simple financial calculation for most firms. It depends on the cost,' she says.

Few of the big players are willing to comment on whether they will transform themselves into these new funds. British Land is said to be readying itself and Land Securities recently pointed out the benefits of such a move.

Peace has called on the Treasury to ensure that today's discussion document on PIFs remains as unrestricted and open as possible. But the success of the scheme will depend on the number of firms that want to get involved and whether there is enough upside for investors - private and professional alike - to get behind this new breed of property companies and push up their shares.