Depreciation, income distribution and the UK REIT
| DOI | https://doi.org/10.1108/14635780810871597 |
| Pages | 195-209 |
| Date | 25 April 2008 |
| Published date | 25 April 2008 |
| Author | Andrew Baum,Steven Devaney |
| Subject Matter | Property management & built environment |
Depreciation, income distribution
and the UK REIT
Andrew Baum
Department of Real Estate and Planning,
University of Reading Business School, Reading, UK
Steven Devaney
University of Aberdeen Business School, Aberdeen, UK
Abstract
Purpose – The purpose of this paper is to consider prospects for UK REITs, which were introduced
on 1 January 2007. It specifically focuses on the potential influence of depreciation and expenditure on
income and distributions.
Design/methodology/approach – First, the ways in which depreciation can affect vehicle earnings
and value are discussed. This is then set in the context of the specific rules and features of REITs. An
analysis using property income and expenditure data from the Investment Property Databank (IPD)
then assesses what gross and net income for a UK REIT might have been like for the period 1984-2003.
Findings – A UK REIT must distribute at least 90 per cent of net income from its property rental
business. Expenditure therefore plays a significant part in determining what funds remain for
distribution. Over 1984-2003, expenditure has absorbed 20 per cent of gross income and been a source
of earnings volatility, which would have been exacerbated by gearing.
Practical implications – Expenditure must take place to help UK REITs maintain and renew their
real estate portfolios. In view of this, investors should moderate expectations of a high and stable
income return, although it may well still be so relative to alternative investments.
Originality/value – Previous literature on depreciation has not quantified amounts spent on
portfolios to keep depreciation at those rates. Nor, to our knowledge, has its ideas been placed in the
indirect investor context.
Keywords Depreciation,Income, Real estate, Investments,Trusts, United Kingdom
Paper type Research paper
Introduction
Over the last three years, there has been serious debate regarding the introduction of a
quoted tax-transparent real estate investment vehicle into the UK. This has culminated
in the passing of legislation in the Finance Act 2006 that enables real estate investment
companies to convert to tax-transparent status provided they meet certain rules. The
new vehicles will be known as UK REITs. It has been argued that the introduction of
UK REITs will increase investment in property (particularly by small investors),
encourage regeneration, facilitate the supply of housing and enable assets currently
held offshore for tax reasons to be brought back within the UK regulatory system
(British Property Federation/Investment Property Forum/Royal Institution of
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
This paper originated from a larger project on depreciation (Investment Property Forum, 2005a)
that was commissioned and funded under the auspices of the IPF Educational Trust and IPF
Joint Research Programme. The authors are grateful for the support of the IPF and IPF
Educational Trust, and for the permission to reproduce empirical results first presented there.
Depreciation,
income and the
UK REIT
195
Received November 2006
Accepted April 2007
Journal of Property Investment &
Finance
Vol. 26 No. 3, 2008
pp. 195-209
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780810871597
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