Real Estate Investment Trusts are attracting interest from investors, writes Laura Slattery

An investment in property that doesn't involve any of the awkward messiness of having to personally buy, let and sell property has long been attractive to investors happy to take the risk of believing the brochures if it means they can capture some of the market's stellar returns without getting their hands dirty.

For those in the high net worth club, there are the syndicates, which have been quietly raking it in over the past decade, choosing their targets carefully. For the average retail investor, there are pooled commercial property funds, often highly geared.

But both types of investment still involve underlying assets that strongly resemble bricks-and-mortar buildings.

Now, thanks to the introduction of something known as a Real Estate Investment Trust (Reit) in the UK, the fashionable property funds are ones that don't actually own any properties at all.

Reits are quoted companies that own or manage rental properties and distribute most of their taxable income to shareholders in the form of dividends.

Although they have existed in the US, France, Germany and elsewhere for some time, legislation enabling UK property companies to convert to the tax-efficient Reit structure only came into effect at the start of the year. Many of the biggest UK property companies, including the two majors British Land and Land Securities, have since converted into Reits, which effectively exempts the companies from corporation tax.

Last week, Standard Life Ireland launched what it described as the first global Reit fund to be available to Irish investors.

With a minimum investment requirement of just €10,000, Reits are "not just for the rich", it says, and allows even modest lump-sum holders access to global property. In an indirect, roundabout way, Irish investors can for the first time buy up small patches of Hong Kong and Singapore for a low five-figure sum.

The fund, which invests predominantly in Reits and other quoted property stocks, will have a 40 per cent holding in Asian property stocks, a 35 per cent holding in European property stocks and 25 per cent in US property companies, with the heavy allocation in favour of emerging markets reflecting Standard Life's positive view of the outlook for Asian economies.

It points out that strong economic growth generally means strong property markets - or at least it did in the case of the Irish market.

The fund is also about 90 per cent hedged into euro, reducing the currency risk for investors, although the cost of this currency hedging is expected to reduce the fund's return by about 1 per cent per annum.

"For euro investors in particular, we consider the Japanese property yield of 7.5 per cent - a 4.5 per cent property yield plus 3 per cent currency hedge into euro - to be compelling value, hence our 19 per cent exposure there," says Jennifer Richards, head of Standard Life Investments in Ireland.

But it is the liquidity of Reits and other property stocks funds that makes them stand out from other methods of indirect investment in property.

Although the Standard Life fund does have exit charges in the first five years of the investment, straightforward unit-linked property funds will also sometimes impose restrictions on investors who want to exit whenever property markets are falling.

Investors could find that the fund managers exercise their right to stop encashment for a fixed period of time, usually six months, or reduce the value of the units being encashed.

"Reits are an excellent way to get exposure to the property market but keep the liquidity of a share," says Killian Nolan, investment analyst at NCB Stockbrokers.

Although Reits are traded on the stock market like equities, the returns over time are more closely in line with the returns that would be generated by direct property investment, according to Nolan.

"Property stocks are more correlated to the property market than to equity markets, but they are not 100 per cent correlated," says Noel Minogue, director of marketing and sales at AIB Investment Managers. "They are less volatile than equity markets and tend to fall less when equities fall."

On the other hand, the returns from real estate stocks in the past have failed to match the spectacular gains enjoyed by direct investors in property, suggesting that the likes of Reits may be more suitable for someone who is looking for an alternative to regular equities rather than as a substitute for direct property investment.

"We would see them as a gap between bonds and property," says Minogue.

In 2006, AIB's European Property Stocks Fund, which has roughly a 50 per cent holding in British companies, generated an exceptional equities-like return of 52 per cent. This made it the top performing fund of the year in the MoneyMate database of more than 500 funds.

According to Minogue, the performance was spurred by the imminent introduction of the new Reits regime in the UK - the expectation that quoted property companies could stop "tax leakage" by converting to a Reit drove their performance.

"A lot of these companies were trading at a discount to the underlying properties; now there is the potential for them to trade at a premium," says Minogue.

This does beg the question of whether a conversion to Reits will help property stocks funds move unambiguously upwards in 2007, or should investors really have got in the game this time last year?

The market moves in anticipation of something happening rather than when it happens, Minogue points out. He believes the value of Reit companies will settle in the first half of this year, but pick up steam later in the year.

Standard Life is marketing its Global Reit fund at Special Savings Incentive Account (SSIA) savers, most of whose lump sums are maturing in April. But if the experience of AIB's property stocks fund is anything to go by, it is likely to be bigger investors that opt for the fund. The average investment in the AIB fund is around €100,000, according to Minogue.

In theory, however, Irish investors can access property stocks funds with as little as €100 spare change, by investing through Dutch online bank RaboDirect. The bank, which claims "anyone can be an investor", sells the Henderson Horizon Pan European Property Equities Fund, which invests in quoted companies that derive most of their revenue from the ownership, management and development of real estate.

Like the AIB fund, it has delivered excellent returns in the past year - almost 45 per cent - and it is currently RaboDirect's second most popular fund.

Standard Life's 2007 target for its Global Reits fund is more modest, saying it expects a return of 12 per cent before charges. Richards says she expects serious demand from pension funds that are worried about overexposure to the Irish and UK property markets and will consider this as a way to geographically diversify their property exposure. Only 21 per cent of its fund is invested in the UK.

This may ease the concerns of anyone who comes across the UK Financial Services Authority (FSA) recent warning to retail investors not to leave themselves vulnerable to the possibility of a significant correction in the UK property market.