REAL ESTATE - Pension funds will scale down direct investment in real estate in favour of UK REITs, according to Land Securities, Europe’s largest property company.

The UK firm’s annual report, published last week, forecast that pension funds opting for “more liquid and less management intensive” REIT shares would drive the emergence of “substantial” new property companies. Such a move would double the quoted real estate sector, which currently accounts for just 14% of the UK market.

But the firm cautioned against over-hyping the appeal of UK REITs for pension funds. Although their introduction in January 2007 would boost indirect investment, “we expect only a small proportion of pension funds and other property investors [to] take advantage of the UK-REIT opportunity”, it said.

A spokeswoman for the firm said its predictions for UK REITs were “purely speculative”. She pointed to potential cost-savings in stamp duty and in-house management teams, but added: “We don’t know the speed at which it may happen – if indeed it does happen.”

Land Securities also confirmed that it would likely convert to a REIT when the legislation comes into force, if shareholders approve the move.

The firm adds its voice to a growing consensus that the introduction of UK REITs will boost indirect investment at the expense of bricks and mortar, despite recent turbulence in equity markets.

A report published earlier this year by Standard & Poor’s, the ratings agency, claimed the introduction of REITs in the UK and Germany would boost market capital by more than $100bn (€80bn) over five years.