In the spring, to paraphrase Tennyson badly, a property man's fancy lightly turns to thoughts of tax and the impact of this week's UK Budget. It was with such thoughts that two separate groups of the property industry's young men approached academics last year, seeking independent research on the need for tax efficiency in real estate investment.
The first research paper was commissioned by the Investment Property Forum, the British Property Federation, the Royal Institution of Chartered Surveyors and the Corporation of London, while the second was sponsored by Helical Bar, law firm Mishcon de Reya and accountants Grant Thornton. Both concluded that the UK would be a better place if only the government would create tax-efficient vehicles for property investment.
The first paper, entitled Property Securitisation in the UK, concludes that "securitisation - trading property assets like tradable shares - would cut transaction costs and boost trading, thus attracting capital back to property and improving the efficiency of the market and economy as a whole".
The second research paper, by the College for Estate Management at Reading, concludes that the tax treatment of property offers more advantages to foreign investors than to domestic buyers and that tax generally exerts a bias against property compared with other asset classes.
"The market for UK property shares suffers from a lack of liquidity arising from double taxation of income, and shares trading at discounts to net asset value," the report concludes.
This last conclusion may raise eyebrows in some quarters, particularly among those who remember that in the second half of 1997 and through early 1998, UK property company shares traded at premiums to net asset value even though the tax structure was identical to that today.
Moreover, the availability of capital allowances to offset against taxable income means that few UK property companies pay an effective tax rate anywhere near the 31 per cent corporate levy.
In fact, it is difficult to see that investors make any distinction between companies based on tax rates. Greycoat, a company taken private last year when its shares were trading at a substantial discount to NAV, was effectively a tax-free vehicle but that fact failed to improve its share price.
Significantly, neither study attempts to examine the actual contribution to the exchequer made by quoted property companies. One can only assume that either the task was deemed too daunting or perhaps that the relative paucity of payments might prove embarrassing to an industry already pleading for stamp duty restraint.
However, the IPF-backed study found that "compared to direct property investment, securitised vehicles are still marginally tax-negative from the exchequer's point of view". But, "compared to the direct property/equities mix scenario, securitised vehicles remain marginally tax-positive".
Moreover, the study determined that the creation of tax-efficient vehicles would encourage far more capital to flow into real estate investment, leading to lower property costs.
Ironically, that outcome is one that the property industry could be said to fear most: an influx of capital into new development which would drive down rents and property values.
Stuart Beevor, managing director at Legal & General Properties and chairman of the IPF's research committee, concedes that the virtuous circle the report predicts assumes new capital is allocated efficiently.
However, he notes that creating the vehicles as quoted securities would expose a greater percentage of the overall property market to wider scrutiny. Lenders and other capital providers would have better market intelligence, and would allocate capital to where it would earn the highest returns.
But he concedes that there is little evidence from other markets that tax-efficient vehicles guarantee good returns. And over the past 20 years, according to data from Investment Property Databank, property has under-performed both equities and bonds.
Still, there are good reasons for the UK to consider creating structures like real estate investment trusts. It is only a matter of time before someone figures out how to invest in UK property through one of these. By any calculation, the outcome would be revenue-negative for the exchequer.
And when it is considering harmonising stamp duty with that levied in other European countries, should it not also consider harmonisation of the tax treatment of property investment?
