As the sale of the Gherkin this year shows, commercial property in the capital is capable of attracting foreign investors prepared to pay a premium for trophy buildings in headline-grabbing deals.

The Gherkin, or 30 St Mary Axe, sold for £630million — a £250million profit for Swiss Re, the previous owner, which continues as tenant under a deal agreed in February with IVG Immobilien. Metrovacesa, the Spanish property group, last month agreed a record-breaking £1.1billion for the HSBC Tower in London’s Docklands.

These big deals are in a market starting to turn. Investors in commercial property are struggling with high prices, high interest rates and falling yields.

The UK commercial property market is now very expensive, says Mark Davies, head of the London property group at PKF, the accountant and business adviser. “Bigger players, such as Land Securities and British Land, have called the top of the market. Property investors and funds have not looked at anything for six to 12 months. It is too expensive.”

The introduction in January of real estate investment trusts (Reits), may have been just in time to give the market a fillip. Property firms and investors will be able to take advantage of a tax regime aimed to attract a wider range of investors.

Property companies converting to Reit status enjoy exemption from UK corporation tax on income and capital gains, enabling a Reit to distribute more of its profits to shareholders in the form of dividends, compared with a non-Reit paying corporation tax at 30per cent.

There are some restrictions on the Reit business model. Reits must distribute to shareholders a minimum of 90 per cent of their exempt income in dividends. They must derive a large proportion of their profits from rental income. Property companies converting to Reits can still carry out non-Reit activities but only up to 25 per cent of total profits and assets.

Those strictures mean Reit conversion is not for everyone. Mike Slade, managing director of Helical Bar, says over the next few years his company will concentrate on development.

Reits, he says, are attractive to the investment community because they offer liquidity and transparency. But the tax advantages do not always outweigh the restrictions.

“It is not the best model for the short and medium term. We are not interested in binding ourselves to a 70 per cent investment rule and a 90 per cent distribution rule just at a time when we need to reinvest in development,” he says.

Rebecca Worthington, financial director at Quintain Estates, agrees. “For an asset collector, Reits is a good structure because it is more tax-efficient. But the regulations do not fit our business model.”

Like Helical Bar, Quintain reinvests investment income into development activities. It has two regeneration projects on its books, one in Wembley and another in Greenwich and Worthington worth £7.5 billion. “Investment income is reinvested in development, which we believe will give greater returns.”

There are now 14 Reits listed. Hammerson, British Land and Land Securities became Reits in January as did Brixton plc, the industrial group, Big Yellow, the storage company and Primary Health Properties, the healthcare group. Local Shopping followed in April and Rugby Estates in May (see below).

Andrew Wallace, of the London Stock Exchange, says UK Reits have a combined capitalisation of £37 billion.

However, Reit shares, at a premium in January, are now trading at an average discount of 10 per cent, while the recent pulling of the £2billion float of Vector Hospitality due to lack of institutional support over fears of softening prices, has sent a severe jolt through the property industry. But Wallace argues that it will take time for the market for Reits to mature.

“It takes time for companies and advisers to go through the regulatory process, but the more activity you get, the deeper the capital pool and the more specialists will emerge.”

A tax-efficient exit strategy

Large property companies are not the only ones with growing assets and capital gains implications. An extra benefit of Reits is that they create potential for owner managers who have held property assets to make tax-efficient exit strategies.

Marios Gregori, tax director at PKF, says: “A Reit can talk to family- owned companies that bought property long ago. If it has appreciated, the company owning it would pay up to 30 per cent on disposal. But a Reit could buy the company’s shares and eliminate the legacy gain by paying 2 per cent Reit conversion charge.”

This model has been adopted by Rugby Estates Investment Trust, an exit Reit. Rugby Estates raised £50million on listing and plans a portfolio of properties of £5million to £100million converting to a Reit as it buys them. The 2 per cent conversion charge at purchase brings the property in the tax-exempt net, putting the Reit at a big advantage when buying.