Property Income Companies

An introduction

The term Property Income Company is used to describe a particular type of quoted, closed-ended property investment company that, typically, has the following features:

• tax transparency achieved through an off-shore domicile, usually (but not exclusively) Guernsey
• the objective to provide an above-average dividend income
• a focus on UK or European commercial property
• a listing on the London Stock Exchange, on either the main list or AIM
• an external management structure with a board of independent directors

The first Property Income Company launched in October 2003. This launch was quickly followed by more than a dozen IPOs, aimed largely at individual investors and managed by the leading UK investment houses, such as Isis (later F&C), Standard Life, Insight (later Invista), Invesco, Axa, ING and Henderson.

While the majority of Property Income Companies invest directly in physical property, Henderson and ING launched companies which invest in global property equities (although they have the same accent on dividend yield).

There are many further off-shore property companies listed in London, but they are often involved in development, rather than investment, and therefore fall into a separate category.

Tax considerations

The off-shore domicile of the companies was prompted by tax considerations as the sector was established prior to the introduction of UK REITS. While Guernsey is the favoured location, Jersey, Isle of Man and Luxembourg are also used. The rules vary, but the general effect is to shelter both income and capital gains from tax in the companies themselves (as, at the time Property Income Companies were launched, on-shore property investment companies were liable to corporation and capital gains tax, leading effectively to double taxation). As an additional point, there is generally no withholding tax on dividends, so shares held in ISAs or SIPPs, for instance, suffer no tax at all.

It’s worth noting that although several Property Income Companies have the term “Trust” in their name, off-shore companies can’t be UK Investment Trusts. Although they do bear comparison since they are structured and operate in a very similar way. (Indeed, brokers and analysts who cover the Investment Trust sector tend to cover the off-shore companies as well.)

The introduction of REITs in the UK means a tax-transparent alternative now exists on-shore. REITs are, however, subject to certain restrictions, for instance on leverage and distribution, that don’t apply to Property Income Companies.  Current legislation is such that conversion to REIT status entails payment of a conversion charge equal to 2% of gross assets. In light of the fact that (unlike UK property companies converting in the past) Property Income Companies do not have sizeable capital gains tax liabilities that would fall away on conversion, there is at present little advantage to change.

Company management

The management of Property Income Companies follows a clear pattern. The board of directors is responsible to the shareholders for setting strategy and supervising its execution. They are independent of the manager, and they must exercise their duties in the relevant tax domicile in order not to become liable to UK tax. There are generally at least two directors based off-shore to satisfy this requirement.

The manager is a qualified property asset management house and will normally be remunerated with an annual fee based (on net or gross assets), plus a performance fee.  The precise terms vary, but they are usually set out in the prospectus and annual reports.

Market conditions

Property Income Companies have been affected just like UK REITS by the downturn in the property market. The majority of Property Income Companies have used leverage at differing levels and the recent decline in underlying real estate values has led to several companies facing breaches of banking covenants. In a market generally unwilling to provide further equity, various solutions have involved a renegotiation of lending terms or (usually and) a sale of assets (rather than the Rights issues seen in the UK REIT market). Dividends have in several cases been suspended, and it is therefore essential for potential investors to research each case individually.

The list of Property Income Companies below broadly includes those that operate in the UK or Europe and have the objective of paying an above-average dividend yield. We have supplied the web address of each company (for further research) since it is essential to understand the specific circumstances of each before considering any investment. The list is not intended as any kind of recommendation, and Reita cannot be held responsible for any omission. We strongly urge those considering investment in any security to take expert advice.