When property authorised investment trusts (PAIFs) were introduced into the UK in 2008, they were expected to catalyse new investments into UK real estate. So far, they have failed to take off, with only four PAIFs being launched in as many years.
However, the market is set for an increase of activity in the second half of 2012 as four years of behind-the-scenes activity at institutional giants such as AXA and Legal & General results in a number of new funds.
PAIFs are essentially a tax wrapper for authorised funds, and had been expected to entice offshore open-ended property investment funds back into the UK. The structure can only apply to FSA-authorised funds – either open-ended investment companies or unit trusts.
Before the arrival of PAIFs, tax-exempt investors such as pension funds and ISA investors who wanted to go through an open-ended vehicle were hit with a 20% corporation tax deduction on taxable income.
With the introduction of PAIF legislation in 2008, investors were given access to open-ended vehicles, which were exempt from corporation tax alongside other tax benefits similar to REITs.
Unlike REITs, PAIFs are not listed, and returns do not correlate with the stock market. This means, in theory, that investors get a return that is more closely linked to the value of the underlying asset than is the return they would get from a REIT.
The idea was that this would make them an attractive option because they provide something close to a “pure” real estate return, while the saving on tax frees the fund up to reinvest more capital.
Despite the benefits, the only UK PAIFs are CBRE Global Investors’ £1bn UK Property Fund, the £188m Royal London Exempt Property Unit Trust and independent asset manager Clavis Walden’s £400m Piccadilly UK Commercial Property Income Fund.
A fourth is being launched by residential specialist Hearthstone, which has just won approval for a residential vehicle which it hopes will attract up to £1bn from retail and institutional investors.
However, it seems that the lack of PAIFs is not due to their unpopularity, but the long lead-in times that conversions of existing funds need.
There may have been little noise about PAIFs in the market recently, but it seems that a lot of work has been going on behind the scenes in the world of real estate funds to convert or launch new vehicles, according to John Cartwright, chief executive of the Association of Real Estate Funds.
“Of the 10 authorised funds for retail investors in our membership, a significant number are likely to convert to PAIFs, and the likelihood is that they will do so in the second half of the year” he said.
Among these 10 members are major institutional investors such as Aviva Investors Property Trust, SWIP Property Trust and Standard Life Investments UK Property Fund.
Part of the reason that PAIF’s have a long lead time for conversions is the complexity of the IT infrastructure that they need. PAIFs have three different income streams – interest, property rent and dividends – which most single-stream platforms cannot accommodate.
As well as the technical challenges, the consensus among industry experts is that PAIFs could not have hit the market at a worse moment, arriving during the depths of economic uncertainty in April 2008 – in contrast to REITs, which appeared at the peak of the property cycle and were adopted more readily.
After a slow start, the real estate industry is warming up to PAIFs and embracing the conversion process. As a result, both retail and institutional investors should soon be able to reap the benefits of a widening range of tax-efficient vehicles.
