Brixton warns of oversold property fund backlash

LONDON (Reuters) - British retail investors have piled into commercial property funds in recent years just as the UK market is peaking, raising the risk of a mass retreat from the sector, property company Brixton (BXTN.L: Quote, Profile, Research, Stock Buzz) said on Tuesday.

"The man on the street is flooding into commercial property and has been for two to three years now, arguably just at the time as the cycle is about to wane and turn, which is massively dangerous to the credibility of our market, particularly with the REIT legislation just kicking off," Chief Executive Tim Wheeler said at the Reuters Real Estate Summit in London.

Like other major UK property managing firms, industrial real estate specialist Brixton took advantage of new low-tax legislation to convert into a real estate investment trust this year, amid much fanfare.

REITs are companies that trade like shares and are not taxed on their earnings as long as most of them are paid out as dividends, putting shareholders on the same tax footing as investors of direct property. They are well-established in places such as the United States, Japan and France.

Most of Britain's biggest-listed property companies duly converted into REITs, but the sector has been buffeted so far this year, losing around 19 percent in the period after a 46 percent gain last year .

That has happened against a backdrop of slowing returns in the direct property market after an extended bull run, which Wheeler said was likely to hit secondary properties -- namely, lower-quality buildings in poorer locations -- hardest.

There was therefore a danger of provoking a popular backlash, Wheeler said, citing heavy billboard advertising of REIT and other property funds which had successfully attracted heavy inflows of retail investment.

"A lot of funds have been seeded by poorer quality property and that is the biggest risk," he said. "There is a danger of the bubble being burst a little bit by people's overenthusiasm to hard sell some of the funds."

(See www.reutersrealestate.com for the new global service for real estate professionals from Reuters).