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MARKET COMMENT
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Two key studies into the UK housing market are being published this week, along with the Pre-Budget Report. Kate Barker's review of housing supply may be of particular interest to investors: it's widely predicted that she will recommend the introduction of tax breaks for property investment companies. These will be modelled on real estate investment trusts (REITs), which are common investment vehicles in most other developed economies, especially the US. REITs are exempt from tax on income and capital gains, provided most of their income is paid out to investors in the form of dividends. Removing the current element of 'double taxation' would make these funds, and possibly even existing property companies, more attractive to investors. In fact, property shares have done well this year, arguably in expectation of this development. They've risen 40% since their March lows, while the main market has gone up by a third. At the moment, it is estimated that only one-tenth of UK housing stock is held for investment purposes, mostly by private individuals ('buy to let', in other words). There's almost no residential property investment by institutions, while seven-tenths of our housing stock is owner-occupied, and the remaining 20% is owned by local authorities, housing associations and so on. Some argue that REITs would provide an incentive to develop more housing, easing the chronic supply shortage the UK housing market currently faces, particularly for low-cost homes. They could also boost tax revenues, because investors won't invest in offshore funds. For investors, the benefits of REITs are fairly obvious. They enable more people to invest in property, but in a much more flexible manner than the traditional route of becoming a landlord. Over the long-term, returns from property almost match the stock market, and are better than bonds and cash, so this is a welcome development. REITs also mean that individuals won't need to mortgage themselves to the eyeballs when going down the buy-to-let route. How the UK housing market will cope when all this additional demand is uncorked is unclear. With house prices already looking toppy in many people's minds, stoking demand in this fashion, without an equivalent increase in supply, is only going to stretch prices further. More: The Fool's homeowning centre | Property Investing discussion board.