What Impact will Property Investment Funds (PIFs) have on property prices and investment?

In April 2005 or shortly after, a UK form of the US style Real Estate Investment Trusts (REIT) will launch called Property Investment Funds (PIF) for residential property. This was first mooted late 2003 by the Chancellor and much to most peoples delight he confirmed the plan in the March 2004 Budget. PIFs will allow individuals to sell their properties into the fund to reduce capital gains tax and inheritance tax liabilities, though the income/dividend stream will be taxed as appropriate.

The Government Treasury is designing PIFs in part to stimulate investment in residential properties probably to increase housing supply. A form of PIF has been available for UK commercial property investment to date.

It is uncertain what conditions will be attached to such residential property PIFs – for example, the maximum gearing available. Gearing of 50% or less will be viewed as disappointing by many investors since traditional individual property investment allows gearing up to a maximum of 85%. However, if the regulations and conditions are favourable, there could be a huge influx of private and company funding into such residential (and commercial) property investment.

In essence, many individuals will choose to use PIFs as a retirement fund – many companies may choose to weight their pension funds with UK residential property using PIFs. Much net capital worth may be transferred for property investment purposes to reduce tax liabilities and create a longer-term income stream for families and companies. Consultation is ongoing by the Government – it is viewed as an attractive positive move by banks, building societies, property investors and analysts.

So the effect will be anything from neutral if the conditions are not attractive, to very positive if the conditions are attractive (e.g. if low tax burden, high gearing, low costs, flexible portfolio management is allowed).

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