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Real estate: Is the UK already over-Reited?

The UK has been eagerly awaiting the introduction of tax-free real estate investment trusts for years, so when the legislation permitting them finally took effect at the start of 2007 nine of the UK’s largest property companies were ready to make the switch.

The companies, which included FTSE 100-listed Land Securities, Slough Estates, BritishLand, Hammerson and Liberty International, all enjoyed double-digit share price rises, valuing them at a premium to their net asset value for the first time in years. Investors snapped them up with the expectation of higher dividend payouts to come.

Share prices for all real estate companies have been soaring partly on investor expectation that some of them will either convert to Reits or be acquired by Reits. Several, such as Minerva, and Capital and Regional, rose by more than 30% in the fourth quarter of 2006 alone.

But the bull market in commercial properties does not alone explain this new enthusiasm, as the valuation of offshore listed funds, which have long been popular because they offer almost identical advantages to Reits, has fallen at the same time as Reits have soared. Many offshore listed vehicles that used to trade at a 10% premium to their net asset value have now started trading at a discount of about the same magnitude.

“Reits are currently trading at a premium to Guernsey-and London-listed vehicles even though the market really ought to be seeing them as one and the same,” says Eliot Caldwell, a fund manager at ING Real Estate Investment Management in London.

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