Small investors who want to put their money into property have, until now, been faced with limited options. They could invest in one of a handful of authorised property trusts or they could purchase a buy-to-let property. From January the Government will introduce a third option: the real estate investment trust (Reit).

Reits will offer retail investors a simple way to sink their money into property without the hassle of having to buy bricks and mortar. Instead, small investors will be able to invest in high-profile property developments despite having relatively little money to save. The minimum investments are likely to start at about £1,000.

A Reit, as the name suggests, is a form of investment trust company. They will invest solely in property and in the shares of property companies in the UK or abroad.

Like conventional investment trusts, Reits will be listed on the Stock Exchange and investors will buy shares in the same way that they would buy shares in any other type of company. You will be able to hold Reits within Isas, self- invested personal pensions or even a Child Trust Fund.

Investment experts hope that the new vehicles will give people far greater choice when it comes to investing in property. Bill Hackney, chief operating officer of Cordea Savills, the property fund manager, says: “Historically, there have not been many authorised unit trusts investing in property available to retail investors.”

However, after the market fell in 2000-01, investors were looking for a way to get out of equities and gain exposure to the booming property market. Those who did not want to or could not afford to become landlords had only a small number of funds to consider.

The restricted choice can be explained by the tax treatment of property funds. Money invested in property through a fund is effectively taxed twice: once when the property company has to pay corporation tax and again when the investor has to pay income tax on dividends and capital gains on profits.

Reits will get around this problem because there will be no tax at company level, provided that the company distributes at least 90 per cent of net profits to shareholders.

New Star Property, Norwich Property and Morley Property Investment are all highly thought of, but Mr Hackney says that difficulties can arise because they are open-ended. Over the past few years more and more money has poured into a limited number of property funds. “The fund managers have no choice but to take the money, but because property is very illiquid, it can be difficult to invest that money, which can have an adverse effect on performance,” Mr Hackney says.

The advantage of Reits is that they will be closed-ended, so they cannot suffer from the same oversubscription. Because they are listed on the Stock Exchange, there will be a secondary market in the shares, so they ought not to suffer from liquidity problems. However, their investment trust structure means that Reit shares are likely to trade at a premium or a discount to the net asset value of the fund.

Mr Hackney says: “There is likely to be greater volatility in Reits than in unit trust prices.”

PAULA HAWKINS

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