UK real estate investment trusts (REITs) could lead to a wave of capital coming into the investment property market, according to DLA Piper partner Peter Taylor, head of property at the law firm's Birmingham office.

"Naturally, there is a great deal of interest in REITs," he said.

"A Google search of REITs within UK web pages will yield nearly 100,000 results. This reflects the widespread interest in indirect investment in property, that is owning part of the entity that holds the title to the property. It also indicates the inadequacy of indirect investment methods presently available.

"Existing structures allowing indirect investment in real estate are either available only to major and sophisticated investors or tax-inefficient. Further, there is no straightforward way of dealing with an investment once it is made."

According to Mr Taylor, REITs tackle both these issues.

"That is what makes them attractive to all investors in the real estate market whether they are major undertakings or individual members of the public," he said.

As ever, though, the devil is in the detail. The Government has made various concessions to the property industry in the process of evolution of REITs.

However, the exact wording of the legislation that will govern REITs has not yet been finalised. The latest draft regulations have been published for a period of consultation which closes in around five weeks time.

Mr Taylor said: "The Government has a declared intention to support enterprise in the real estate sector. It is well aware of the success of REITs in other jurisdictions - especially in the US. It is also very wary of tax leakage and it is very determined to get this aspect right.

"But it is important that a vibrant REITs sector is created in the UK and that it is not made sclerotic by over-detailed regulation.

"Nevertheless, the Government is to be commended on taking a very consultative approach to the introduction of REITs right from its first announcement in the 2004 Budget and listening to a number of the property industry's concerns."

REITs are intended to embrace the property industry's 'Holy Grail', offering the 'big three' of tax transparency, opportunity and liquidity.

Mr Taylor added: "The proposed tax transparency of REITS will mean that income is taxed in investors' hands. There is no tax at REIT level. Therefore, investors can use whatever exemptions and reliefs they have.

"REITs provide opportunities for anyone to put their hard-earned savings into the same portfolio of prime properties in which a major corporation may be investing millions.

"High-performing sectors, like shopping centres, have previously been available only to big players in the real estate industry.

"With UK REITS, they will be accessible to all - even individuals. So Joe and Josephine Bloggs can enjoy pound for pound the same level of success of, say, the shopping centre market as a major institution even if they can't get near buying a shopping centre themselves.

"As they will be listed companies, REITs provide liquidity. You can get out at any time by selling your shares in the REIT and not have to wait for formalities of a land sale to be concluded. Lawyers are working well together to improve the liquidity of real estate. But stock exchange dealings bring about big advantages in relation to transaction taxes."

Details will be contained in the Finance Act and rules and regulations made under it.

Some elements were made clear in the 2006 Budget. The conversion charge will be two per cent of company's value, but this can be paid in instalments over four years.

Single shareholdings must be kept below ten per cent and 90 per cent of the profits be distributed. The gearing level (profits to interest cover) is to be 1.25. The government originally proposed a 95 per cent distribution test and a gearing level of 2.5, but such figures were modified as a result of concerns expressed by the property industry.

REITs must be in property rental business. Other activities, which must generate no more than 25 per cent of the REIT's profits and comprise no more than 25 per cent of the REIT's assets, must be ring-fenced.

Further, REITs must hold at least three properties which are not owneroccupied. No one property can account for more than 40 per cent of the value, on a cost basis, of all REIT properties.

Mr Taylor pointed out that a REIT must be UK resident for tax purposes and cannot be resident elsewhere or be dual resident. The properties owned by a UK REIT, though, can be located anywhere in the world.

However, a breach of these rules will lead to a loss of REIT status.

Mr Taylor said: "It sounds straightforward enough but could easily become hope-lessly complicated - as well as dangerous. Even a minor breach could mean loss of REIT status and tax transparency.

"Also, the fact that a very significant part of all ring-fenced property income is distributed quickly to investors limits a REIT's freedom of action to build up reserves for maintaining the quality of its assets."

REITs have been popular in the US for more than 40 years and America has 170 publicly-traded REITs which are credited with the revival of the property industry. These specialise in investment in property in various sectors - there is even a prison REIT.

REITs have also been authorised in Australia, Japan, Hong Kong, Singapore and France.

Mr Taylor said: "The Government hopes that REITs will increase both the size and the stability of all sectors of the property market - including residential.

"Indeed, with one eye on the recommendations of the Barker Report, the Government sees REITs as providing a route into which rented housing can be sold. There would also be opportunities for professional management of this critical sector.

"And the Government, wary of yet another misselling scandal, is looking at the extent to which REITs should be regulated. Making it compulsory for REITs to be listed on the Stock Exchange introduces a great deal of regulatory red tape to what is likely to become a lively sector."