The debate over which is better – listed or unlisted property – has rumbled on for years. But in Europe it has been reignited by Britain and Germany's decision to introduce real estate investment trusts (Reits).

For pension funds investing in property, unlisted funds have long had the upper hand over shares in listed companies. That is because they pay less tax by comparison.

For the last few years, the property unit trust (Put) sector has resided almost unilaterally in offshore tax havens. But by giving the green light to Reits, the UK Treasury has suddenly levelled the playing field.

Suddenly, shares in companies such as Hammerson, British Land or Slough Estates, with good management track records, seem as valid an investment option – on tax grounds – as stakes in Puts.

The internationalisation of the industry, with growing competition from funds investing abroad or in foreign Reits, means that Puts face a lot of new competition.

The benevolent view, expressed by William Hill, head of property at Schroders, is that the explosion in choice is good news for everyone. "The choice going forward will be a mouthwatering one for investors of all shapes and sizes," he predicts.

In the US, the largest Reit market in the world, listed securities sit happily alongside the much larger unlisted property investment world.

"It is early days for the Reit model but in the US Reits have co-existed with private vehicles for years, they are a different type of vehicle," says Richard Plummer, chairman of Rockspring Property Investment Managers.

This view is shared by Marc Halle, portfolio manager of global real estate securities strategy for Pramerica Real Estate Investors.

"While Reits are a very attractive investment option for both institutional and retail investors, they will not displace existing investment vehicles," says Mr Halle.

"As demonstrated by the successful Reit markets in the Netherlands, United States and Australia, Reits are a complement to existing real estate investment strategies. The addition of Reit investments to a portfolio has shown to be effective in increasing risk-adjusted returns and enhancing portfolio returns."

The two types of vehicle have very different characteristics. Unlisted funds tend to trade in parallel with their underlying value. Listed securities may lurch wildly with either premiums to discounts to valuations – depending on the mood of the stock market. The correlations between direct property and property shares are dubious at best.

For this reason alone, it is easy to see why many investors will retain an attachment towards unlisted funds such as Puts. Not least because one of the main reasons for buying property is to gain diversification away from equities.

The number of investors in any given Put may vary from hundreds to half a dozen. In the latter case, members may see them almost as an "exclusive" club of like-minded individuals who will not abandon ship at the first sign of market turbulence. For that reason, they may prefer to stick with such structures rather than enter more democratic Reits where prices are at the whim of wider market sentiment.

Paul Jayson, associate at DLA Piper Rudnick Gray Cary, the law firm, says Puts will remain popular because investors pay no stamp duty – unlike the 0.5 per cent on the purchase of Reit shares.

They also have an advantage for overseas investors in that there is no withholding tax, no gearing restrictions and no conversion charge.

Yet there are critics of property unit trusts, the most notable perhaps being Mike Prew, an analyst from Lehman Brothers.

In a report, he criticised Puts as "acutely illiquid, opaque, inaccessible and partially regulated". Concerns remained over transparency, performance and management fees liquidity, he wrote. In addition, "performance reporting by Puts is confusing and idiosyncratic."

Mr Prew predicts that the rerating of listed securities – as they turn into Reits – could starve Puts of capital and see them de-rated.

Even some fund managers admit that they are facing a new wave of competition.

"Will it reduce the appetite for unlisted vehicles, inevitably to some extent," says Andrew Smith, head of strategy at Arlington, now part of Macquarie Goodman. "Although it is not a substitute, it is just another investment option."

The big question for fund managers is whether they will seek to keep a foot in both camps.

Few experts expect them to convert many of their existing vehicles into Reits. However, in future they may continue to launch unlisted vehicles but also set up new Reits.

That is the view of John Partridge, head of Cordea Savills, the fund management group. He predicts that half of the firm's funds will be listed within five years or so.

More generally, Reits will prove increasingly popular because they allow pension funds instant access to an array of very liquid vehicles in different markets.

"They will probably co-exist side by side with unlisted funds," predicts Robin Goodchild, head of European strategy at LaSalle Investment Management.

At the same time, Mr Goodchild argues, there is still a case for investors to hold property in a third way – directly. Apart from anything else, it allows them to retain total control.

"I think indirect funds have many advantages but they have one disadvantage," he says. "The liquidity in pricing is fine in strong markets or stable markets but if you have a bad period – which hasn't happened for a long time but does happen now and again – and people want to hit the exit, they may find it hard."

Although investors have redemption rights, if they decide to sell en masse they have to form an orderly queue and have no say over the pricing achieved.

Given the extraordinary level of liquidity in the direct property market, with some buildings changing hands in 80 days or less, "liquidity in some of the funds can be less than in the direct market," argues Mr Prew.

"By buying indirectly you are giving up control, which may or may not matter to you," says Mr Goodchild. "If you are investing £75m o less you should do it indirectly.

But if you are a UK investor and are looking to put £100m in the domestic market, it is sensible to have your own segregated account.

Source:  Financial Times