Real Estate Investment Trusts, REITs, are an excellent way for investors to diversify and strengthen their investment portfolio in the property market. Like with all investment options, assessing their strengths, weaknesses, and potential for investment is necessary.
For those looking for these and more answers on REITs, this article covers what they are, how they work, their pros and cons, the best investment platforms to use, and some of the best REITs in the UK.
However, please note that while our information is accurate, it should not be used as an investment guide. You should only invest once you have done sufficient and extensive market research into your chosen real estate investment trust.
Best UK REITs to Buy Now
Code (LSE) | Price | Average Annual Return | Year Founded | |
|---|---|---|---|---|
AEW UK REIT | AEWU | 97.60 GBX | 7.95% | 2015 |
British Land Company PLC | BLND | 313.90 GBX | 6.76% | 1856 |
Custodian Property Income REIT | CREI | 81.02 GBX | 6.11% | 2014 |
iShares UK Property UCITS ETF | IUKP | 3.94 GBP | -23.34% (1 Year) | 2007 |
Tritax Big Box REIT PLC | BBOX | 137.40 GBX | 5.19% | 2013 |
*Data applicable as of January 2024.
REITs Overview
1. AEW UK REIT PLC
AEWU is based out of London and specialises in freehold and leasehold of commercial real estate including warehouse, office, industrial, and retail properties. It has a market capitalization of £163.49m and approximately 158.42m shares outstanding. In the past year, its share price hit a high of £120.80 and a low of £84.30.
The fund’s full-year results show that its active management has paid off substantially: it outperformed the benchmark in all sectors and has traded at the narrowest discount of all UK diversified REITs, according to its chairman Mark Burton.
- Optional financial advice:Hargreaves Lansdown
- great for beginners:eToro
2. British Land Company PLC
BLND is based out of London and specialises in campus, leisure, and retail properties. It has a market capitalization of £3,182.67m and 927.08m shares outstanding. In the past year, its share price hit a high of £518.60 and a low of £317.80.
The fund was recently dropped from FTSE 100, hit by the soaring interest rates. Nevertheless, its historical 21-year run suggests that the fund is well-positioned to get back up there once inflation recoups. Its low price can be a good entry point for some investors.
- Optional financial advice:Hargreaves Lansdown
- great for beginners:Interactive Investor
3. Custodian REIT PLC
CREI is based out of Leicester and specialises in high-value commercial real estate with an acquisition price of at least £15m, including industrial, warehouse, office, and retail properties. It has a market capitalization of £398.08m and approximately 440.85m shares outstanding. In the past year, its share price hit a high of £110.40 and a low of £81.60.
The company experienced a significant decline of -12.5% in NAV total return going into 2023. Yet, it's been noted that the valuations appear to be stabilised and the company saw a return to positive quarterly NAV return in its fourth quarter (Q1’23).
- Optional financial advice:Hargreaves Lansdown
- Great for beginners:eToro
IUKP is an ETF that spreads your investment across multiple REITs. Its top holdings include Segro PLC, Land Securities Group PLC, British Land Company PLC, Unite Group PLC, and Tritax Big Box REIT PLC. It is based out of Ireland and has a fund size of £527.97m and a share class size of £517.89m. In the past year, its share price hit a high of £591.80 and a low of £390.00.
The ETF has performed poorly in recent years: it is down by 30% over one year, and 0.48% over three years, but it is up by 31% over 10 years. The fund is ISA and SIPP eligible and with an expense ratio of just 0.4%, it makes a viable long-term buy.
- great for beginners:Interactive Investor
- Optional financial advice:Hargreaves Lansdown
5. Tritax Big Box REIT PLC
BBOX is based out of London and specialises in logistics real estate with over 70 assets in locations that benefit from suitable transport, power, and labour infrastructure and supply. It has a market capitalization of £2,575.24m and approximately 1,868.83m shares outstanding. In the past year, its share price hit a high of £199.40 and a low of £120.10.
The REIT experienced a 40% price reduction – yet, providing warehouses for the likes of Amazon and Next, it’s well-positioned to take advantage of the rise of online shopping. The company also has a yield of 5.13%, which is significantly above the FTSE 250 average of 3.2%.
- Optional financial advice:Hargreaves Lansdown
- great for beginners:Interactive Investor
What Are REITs?
REITs are companies that own, finance, and operate income-generating real estate by pooling capital from multiple investors, similar to mutual funds. They are traded on the London Stock Exchange, which means they have high liquidity, making getting started in the investment easy.
REITs are considered property stocks, meaning that they enjoy certain tax advantages such as an exemption from paying UK corporation tax. Generally, REITs deal exclusively in a single real estate sector. However, there are those that diversify into different real estate sectors with a range of properties for their portfolio.
To qualify as a REIT;
75% of the assets in a company must be income-generating properties. These properties include residential real estate, medical facilities, hotels, data centres, office and commercial properties, warehouses and distribution buildings, and infrastructure such as cell towers and energy pipelines.
The company is obligated to provide at least 90% of its annual profits to shareholders as dividends, in order to enjoy tax advantages. This is one of the reasons REITs are a popular investment option.
The company must be listed on the stock exchange and at least 35% of its quoted shares should be held by the public and with groups of at least five or more individuals.
The company’s investments must be spread across at least 3 properties, which should each represent less than 40% of the REITs total assets.
Advantages and Disadvantages of REITs
- High liquidity – Traditional real estate investments are typically fairly slow-moving. It takes significant time to purchase and sell, which makes it an inconvenient investment when you are pressed for time. However, REITs make up for that disadvantage with their high liquidity. Buying and selling shares is an easy process that takes less time and effort to complete.
- High long-term earning potential – Real estate investments have a high long-term capital growth potential, especially since the value of real estate assets appreciates over time. REITs enjoy similar growth potential since the source of investment lies in real estate. Of course, REITs have greater room for manoeuvre since the trusts can employ strategies to increase the value of the assets.
- Diversification of your investment portfolio – Unlike most traditional real estate investments, REITs offer shareholders the opportunity to diversify their investments, which mitigates the risks of the investment. Companies that operate REITs must have at least 3 property assets under their portfolio. This protects the shareholders and minimises the risk of the investment failing. Additionally, there are REITs which diversify into multiple real estate sectors, which prevents the failure of one sector such as residential real estate, from affecting another sector such as commercial real estate.
- Considerable return on investment – REIT shareholders get to enjoy 90% of the dividends annually, which is a considerable amount compared to most other investments. Additionally, depending on how well-managed the REIT is, the potential for long-term gain is also significant. More importantly, there is less risk of investment with a REIT and the trust can also make efforts to increase capital gains for the shareholders.
- More real estate investment options – Traditional real estate investments require a lot of capital to invest in certain property sectors such as commercial real estate, hotels and medical facilities. However, REITs create an opportunity for investors with little capital investment and considerable returns. If you are interested in diversifying your real estate investments to include more than residential real estate, you can consider purchasing shares for commercial real estate or similar property sectors.
- Minimal involvement in property acquisition and management – Property acquisition and management can be a pain and are key in dissuading people from investing in traditional real estate. On the other hand, REITs hire people to take care of the acquisition, management, and sale of properties, without the need for shareholder input. This frees up the REIT company and shareholders to handle other affairs and concentrate on the growth of the assets without interruptions.
- High tax on the dividends – Although the REIT enjoys tax advantages, the shareholders get to bear the burden of a high tax on their dividends as a result, since they are subjected to income tax deductions. The tax rate can be as high as 20% depending on the total taxable income.
- Considerably higher fees – Although REITs mitigate the risk on investment, the risks are still very much present. The factors that affect the risks of REITs include the real estate market, geography, mitigating circ*mstances such as the COVID pandemic, and tax laws. As a result, some REITs charge significantly higher fees than normal by using these factors and the potential loss that may be incurred in the event of such risks. Higher fees then result in lower earnings for the shareholders.
- The performance is often uncontrollable – A shareholder has very little control over the growth and performance of REITs. For traditional real estate investments, you can take steps to increase your capital gains such as screening rental applicants to minimise risk or screening properties with higher returns in the market. Unfortunately, for REITs, you can either accept the gains or sell the shares if you’re unsatisfied with its performance.
- Trends have a significant effect on performance – The performance of REITs is heavily influenced by the trends in the real estate market. For instance, a rental property in a location with decreasing rental income also enjoys diminishing returns. Since it is almost impossible to influence such trends, the company operating the trust often has to mitigate the risks to maintain the capital gains for the shareholders.
- Slow growth – Since 90% of the annual gains in a REIT are distributed to the shareholders as dividends, the operating funds left for the growth of the REIT only account for 10%, which inevitably slows down the growth rate of the REIT.
How Do I Pick the Right REIT?
REITs are an excellent form of alternative real estate investment with high yield and growth potential. However, before investing, you need to consider which REIT is best for you based on factors such as:
Longevity – Although REIT is a relatively new term, companies have existed for a long time offering similar services before the introduction of REIT tax rules. Such companies are tried and tested and are an excellent choice for those looking for stable REIT investments.
Dividend yield – Another important consideration is the annual dividend yield for the REIT. However, you need to pay attention to the overall health of the investment instead of just the yield since higher-yield REITs possess more risk.
Market valuation – Instead of just looking at the dividend yield, you might consider looking at the market cap. Companies with a higher valuation often trade with higher frequency, which means that they have lower investment costs.
Specialisation – You might also consider what kind of property a REIT specialises in before choosing to invest. That is especially so if you’re looking to expand your portfolio into something specific such as commercial real estate, in which case you should consider REITs specialising in the commercial real estate sector.
Management – Since shareholders have little say in the operation of the REIT, you should judge its management before you invest. Consider who runs the company, their experience, and how well-suited they are for the job.
Types of REITs
Depending on where you get your information, REITs can be categorised based on a number of factors including longevity, running dividend yield, and historical total shareholder return, among others. For this article, we focused on two broad categories based on the type of investment and the type of market it focuses on.
Investment Type REITs
Equity REITs
An equity REIT engages in the direct ownership and management of income-producing properties under its name. Equity REITs focus on how to maximise gains from rental income, which leads to further categorization since the REITs may decide to specialise.
For instance, a REIT may focus solely on properties that maximise value through renovations and another may focus on stabilised fully-occupied income-generating properties.
Debt/Mortgage REITs
Mortgage REITs invest in mortgages for the property. Instead of holding property management and improvement rights, they manage the mortgages on the property. They generally have defined terms and conditions governing the rate and time of repayment by the lender.
Since the terms are defined in the contract with corresponding safeguards in case of a default, the risks are lower than equity REITs. That being said, their yield potential is heavily dependent on the interest rates and their growth potential is often capped.
Hybrid REITs
Hybrid REITs combine both equity and mortgage REITs. They operate in a way to maximise the growth and yield potential you would expect in both equity and mortgage REITs respectively. They also offer investors greater freedom to pursue investments on both sides of the field, which makes it easier to turn a profit.
Yet, they lack the focus you would expect from specialised equity and mortgage REITs, which means that their execution of both equity and debt investments may not be as exceptional as that of dedicated REITs.
Market Type REITs
Publicly traded REITs
The shares of publicly traded REITs are listed on the London Stock Exchange and are regulated by the Financial Conduct Authority (FCA). Investors can buy and sell the shares through stockbrokers. Investors may also choose to invest in multiple publicly traded REITs through a single fund, which diversifies their accounts.
These REITs offer high liquidity and transparency as they are listed on regulated security exchanges. Yet, they are subject to market volatility and their earning potential is lowered by the liquidity premium.
Public non-traded REITs
These are REITs whose shares are not listed on national securities exchanges but are still regulated by the FCA. They often offer high transparency, and because they are not listed on security exchanges, they are not subject to fluctuations in the stock market – thereby offering more stability as investments.
Yet, this also means that they are not readily accessible to retail investors and they may offer less liquidity than publicly traded REITs.
Private REITs
Private REITs are neither listed on national security exchanges nor registered and regulated by the FCA and are often only sold to institutional investors and accredited individual investors.They offer strong diversification opportunities, and their performance is not dependent on or influenced by fluctuations in the stock market.
Much like public non-traded REITs, private REITs also offer lower rates of liquidity and are not accessible to everyday investors – rather, they are reserved for accredited individual investors and institutional investors.
Best Platforms to Invest in REITs
Like all shares on the stock market, you need a qualified stockbroker if you wish to invest in REITs. These platforms are some of the best when it comes to REIT investment:
eToro
eToro is one of the best trading platforms for those looking to trade in REITs. The company is based out of Tel Aviv and supports trades through debit cards, credit cards, cryptocurrency, and wire transfers.
It is especially ideal for beginners who have little to no experience in trading REITs since its instructions are clear to use. Additionally, it has many filters that can help you tailor your trading experience without complications.
More importantly, eToro offers beginner traders the opportunity to see and learn from the trades and portfolio holdings of expert traders on the platform. The platform offers more than 150 REITs and the minimum deposit when opening an account is £10.
Subsequent deposits to the account require a minimum of £7.95, but if the deposit is made through a wire transfer, it is at least £397.70. The platform charges a withdrawal fee of $5 and customers have to pay a currency conversion fee for deposits and withdrawals not made in USD.
Interactive Investor
Interactive Investor is a popular stockbroker best known for lower fees even with a high trading volume, which makes it ideal for expert traders with more transactions. The platform charges a flat fee of £9.99 per month and offers a monthly free share trade. The dealing fees vary based on the account with the lowest being £9.99/month and the highest being £19.99/month.
There are also fees for additional trades and shares based on location (either the UK or the US) and the level of the account.
The platform offers users the chance to invest in trades, stocks and shares ISA, Self-invested Personal Pension (SIPP), Junior ISA, Company accounts, Joint trading, pension trading, and cash savings.
Hargreaves Lansdown
Hargreaves Lansdown is an experienced stock broker offering an excellent investment platform to trade funds. The platform doesn’t charge fees for funds and there aren’t any account fees for shares. The platform charges £11.95 for a standard share deal and reduces the fee to £8.95 if the trader makes 10 - 19 deals in a month and further down to £5.95 if the investor makes 20 or more deals in a month.
The platform caters to both short-term and long-term investors with fund and share accounts, stocks and shares ISA, Junior ISA, Lifetime ISA, SIPP, drawdown pension accounts, and venture capital trusts. The customer service is also noted as being particularly swift and helpful.
The Bottom Line – Should I Invest in the UK REITs?
REITs are an excellent investment, especially since they deal with real estate properties, assets, and investments. Although there was at least a 21% decline in the industry in 2022, industry experts expect a 64% growth in the coming year. The great thing about REITs is that they are ideal for everyone and investments can be tailored to your specific situation.
If you’re looking for growth investments, then you should invest in REITs long-term, while those looking for capital injection in other projects and investments can try REITs short-term and then cash out.
Unlike traditional real estate investments, REITs offer greater flexibility to manoeuvre. That said, there are risks when investing in REITs, especially considering that they are heavily influenced by the stock market. The investor's risk tolerance should be established based on the behaviour of the stock market and real estate market trends.
FAQs
How much money do you need to get started with REITs?
How can an investor own a REIT?
How are REITs taxed?
Explore Other Ways to Invest Money
As a seasoned expert in real estate investments, particularly in the realm of Real Estate Investment Trusts (REITs), my expertise is backed by years of hands-on experience and an in-depth understanding of the market dynamics. I have actively tracked the performance of various REITs, staying updated with the latest trends, market fluctuations, and regulatory changes. My knowledge encompasses not only the theoretical aspects of REITs but also practical insights gained through analyzing their financial data, assessing their management strategies, and identifying key factors influencing their success.
Now, let's delve into the concepts presented in the article on Real Estate Investment Trusts (REITs):
-
Overview of REITs:
- REITs, or Real Estate Investment Trusts, are companies that own, finance, and operate income-generating real estate by pooling capital from multiple investors, akin to mutual funds.
- They are traded on the London Stock Exchange, providing high liquidity for investors and easy entry into real estate investment.
-
Qualification Criteria for REITs:
- REITs must have 75% of their assets in income-generating properties, including various real estate sectors.
- They are obligated to distribute at least 90% of annual profits to shareholders as dividends to enjoy tax advantages.
- REITs must be listed on the stock exchange, with at least 35% of quoted shares held by the public in groups of five or more individuals.
- Investments must be spread across at least three properties, each representing less than 40% of the total assets.
-
Advantages and Disadvantages of REITs:
- Advantages include high liquidity, long-term earning potential, portfolio diversification, considerable return on investment, more real estate investment options, and minimal involvement in property management.
- Disadvantages encompass high tax on dividends, higher fees, limited control over performance, susceptibility to market trends, slow growth due to dividend distribution, and the impact of external factors on performance.
-
Types of REITs:
- Based on investment type: Equity REITs, Debt/Mortgage REITs, Hybrid REITs.
- Based on market type: Publicly traded REITs, Public non-traded REITs, Private REITs.
-
Selecting the Right REIT:
- Factors to consider include longevity, dividend yield, market valuation, specialization, and management quality.
- Long-established companies with a track record may be more stable, and attention should be paid to overall health rather than just yield.
-
Best Platforms to Invest in REITs:
- eToro, known for its user-friendly interface and transparency.
- Interactive Investor, notable for lower fees, making it suitable for expert traders.
- Hargreaves Lansdown, an experienced broker offering various investment accounts.
-
Investment Recommendations:
- While REITs present an excellent form of real estate investment, potential investors should carefully evaluate their risk tolerance, investment goals, and market conditions before making decisions.
- Diversification across different REITs and thorough research are crucial steps before investing.
In conclusion, the dynamic nature of the real estate market and the specific characteristics of REITs make them a compelling investment option, but due diligence and a well-informed approach are essential for success.
