REIT is an acronym for Real Estate Investment Trust and is an extremely popular investment vehicle both in the UK and Globally. In this guide, we will look at How to Invest in REITs (UK) and how to select a REIT that matches your own investment criteria.
What is a REIT?
For those of you who already know what a REIT is, feel free to skip this part of the guide and move on to the next section. A Reak Estate Investment Trust (REIT) is a company that generates taxable income by owning, operating, or financing real estate. To qualify as a REIT, at least 75% of the company’s assets must be invested in real estate, and this investment must generate income through rent or interest. REITs provide a way for individuals to invest in large-scale, income-producing real estate.
For the most part, a REIT will specialise in one area of real estate, the options available to a REIT are residential, commercial or industrial. However within each one of these three options are multiple sub-categories e.g. student housing, hotels, shopping malls and many more.
One of the most important elements to consider when contemplating investing in REITs is that, unlike similar products such as property bonds. REITs are often listed on major exchanges and are publicly traded.
What is ‘real estate’ for the purposes of a REIT?
Real estate generally refers to land and anything permanently affixed to it, including buildings and other improvements. For real estate investment trusts (REITs), real estate assets typically include:
- Residential properties like apartments, houses, etc.
- Commercial properties like office buildings, shopping centres, hotels, etc.
- Industrial properties like warehouses, factories, and storage facilities.
Specialty properties like cell towers, data centres, and healthcare facilities.
Land and land rights associated with the properties.
The key aspects are that REIT real estate assets are tangible, physical properties that generate income through rent, lease payments, or capital appreciation. Intangible property like mortgage-backed securities and intellectual property don’t qualify as real estate for REITs. The income and assets must also meet certain thresholds to maintain REIT status. So “real estate” for REITs has this specific meaning based on physical, income-generating property.
Are all REITs publicly traded?
No, not all REITs are publicly traded. There are two types of REIT companies, private and public. A publicly traded REIT company is one that is listed on a stock exchange, a private one will not be.
REIT ETFs
Here are a few key things to know about REIT ETFs (real estate investment trust exchange-traded funds):
- REIT ETFs allow investors to gain exposure to a basket of real estate investment trusts (REITs) in a single fund. REITs invest in various types of real estate like apartments, hotels, offices, etc
- Some popular REIT ETFs are Vanguard Real Estate ETF (VNQ), iShares U.S. Real Estate ETF (IYR), and Schwab US REIT ETF (SCHH). They track different indexes of REITs.
- REIT ETFs provide diversification across real estate sectors and geographic regions. They offer a low-cost way to invest in real estate without having to buy physical properties.
- REIT ETFs generally pay above-average dividends compared to the broader stock market due to the high dividend payouts from REITs. However, dividends are taxed at ordinary income tax rates.
- As with individual REITs, REIT ETF performance is sensitive to interest rates. Rising rates can negatively impact prices as the appeal of dividends declines.
- Overall, REIT ETFs can be a good addition to a diversified portfolio for income and real estate exposure. However, research the specific ETF holdings and risks before investing. Proper asset allocation is key.
Different types of REITs
Although REITs are all all real estate investment trusts there are several different types. Before investing in a REIT it is important to understand the nuances of each type so that you can select the one that best mirror your own investment goals.
1.Equity REITs
An equity REIT is a company which either owns or invests in real estate.
Our Expert Advice
“An equity REIT is great because it allows investors to partially invest in large-scale commercial developments they otherwise would not have access to, the flip side is that Equity REITs are more exposed to market fluctuations than say a Mortgage REIT” – Alex Santos REIT Specialist at NCL
2.Mortgage REITs
A mortgage REIT (real estate investment trust) is a type of REIT that lends money to real estate owners and operators or invests in mortgage-backed securities.
Our Expert Advice
“The benefit of a Mortgage REIT is that it provides higher interest rates compared to other types of REIT, the downside is that they carry higher risk as their performance is intrinsically linked to interest rates and unfortunately interest although predictable is not controllable – REIT Specialist at NCL.
In addition to Equity and Mortgage REITs, there are other options such as
3.Healthcare REITs
Healthcare REITs are Investment trusts that invest in hospitals, medical office buildings, doctors’ offices, and care homes.
4.Office REITs
Office REITs will primarily invest in skyscrapers, business parks, and government buildings.
5.Residential REITs
Residential REITs will concentrate on multi-tenancy blocs such as student housing, apartment complexes, and family homes.
6.Industrial REITs
Industrial REITs will own or invest in industrial premises such as warehouses, distribution centres, and e-commerce properties.
7.Retail REITs
Retail REITs are companies that have 75+ of their cumulative assets invested into shopping centres, power centres, grocery stores and any other commercial retail premises.
8.Infrastructure REITs
The final class of REITs is infrastructure. Infrastructure REITs will most commonly invest in buildings such as telecommunication towers, energy pipelines, and wireless infrastructure.
We have analysed all of the REITS on offer and in “Our” Opinion these are the top 5 REITs to Watch
How to buy shares in real estate?
Investing in real estate can be done in several ways, with REITs being a popular and accessible option. Regardless of the method, it’s advisable to consult with a professional to ensure your investment strategy aligns with your financial goals.f which method you choose, is to always consult a professional.
How do REITs work?
REITs are companies that own, operate, or provide financing for income-producing real estate. The properties are varied and include apartments, hotels, shopping malls, offices, hospitals, and more. REITs allow individual investors to invest in professionally managed real estate portfolios, helping to diversify their holdings and earn passive income. To qualify as a REIT, the company must pay out at least 90% of its taxable income annually to shareholders in the form of dividends.
This results in REITs typically having relatively high dividend yields. Most REITs specialise in a specific real estate sector, like retail or residential, which provides investors with targeted exposure. REITs can be publicly traded on major stock exchanges, purchased through mutual funds or ETFs, or invested privately, with publicly traded REITs providing the most liquidity. As with direct real estate investments, REITs are sensitive to interest rates, with rising rates able to depress share prices. REITs also carry risks like vacancies, overbuilding, mismanagement, and more.
They are pass-through entities, so shareholders pay taxes on the dividends received instead of the REIT paying corporate taxes, with dividends taxed at ordinary income rates. REITs tend to perform well during periods of economic growth and real estate appreciation, but returns ultimately depend on the quality of the properties owned and management’s capabilities. In essence, REITs allow pooled investment in real estate assets, with shareholders earning dividends from the income produced.
How to trade REITs
We do not recommend trading REITS (unless you’re a professional or extremely advanced trader). But if you are set on trading REITs then here are our top 3 tips to consider when doing so
- Always Use limit orders – REITs often have wide bid-ask spreads. Always use limit orders to control the entry and exit price.
- Watch trading volume -Avoid low-volume trades, always ensure there is sufficient volume for the position size you want to take.
- Factor in dividends – Dividend payouts affect REIT pricing. Understand ex-dividend dates and account for dividends in trade planning.
Although these are good rules of thumb unless you are a full-time equities trader. It’s best to consult with a financial advisor.
Benefits of REITs
REITs have lots of benefits, but the main one is that they allow investors who have a natural affinity for real estate propositions, to invest in real estate without the onerous and time-consuming task of physical marketing, managing and owning property. A REIT is essentially a fund where investors pool money together to benefit from the security of a tangible real estate investment.
REITs will typically manage a multitude of properties and property types, this again represents huge benefits as this diversification helps negate risk. The other positive points that contribute to people investing in REITs are:
- Dividend income – REITs must pay out 90% of taxable income as dividends, which typically equates to high dividend yields.
- Professional management – REITs invest in real estate portfolios that are professionally managed.
- Liquidity – Publicly traded REITs are bought and sold on major exchanges, providing daily liquidity.
- Low investment amounts – You can invest in REITs with minimal capital through a brokerage account.
What are the risks?
Similarly to any investment, REITs do carry risk. Different REIT types will invariably carry their own individual risks.
- Interest rate sensitivity – Like property bonds, REITs are impacted by changes in interest rates. Rising rates can drive share prices down.
- Economic conditions – Performance is tied to the real estate market and the overall economy. Market downturns can hurt REITs.
- Tax treatment – REIT dividends are taxed as ordinary income, so yields are reduced versus just capital gains.
- Management risks – As with any company, poor management can damage REIT performance and shareholder value.
How to Cash out of Real Estate Investment Trusts in the UK
Cashing out of a REIT will depend mainly on whether it a public or private. A public REIT is made up of shares and cashing out is just a case of selling some or all of your equity in that company. A private REIT will have its own realisation terms and these should be fully understood prior to investing.
Where to find REITs
As with any investment product, the best place to find them is with your broker or financial adviser. Although it is possible to research and purchase REITs online, it’s always good practice to speak with a specialist who can effectively understand your financial circ*mstances and subsequent objectives.
If you looking to invest in a REIT, then the best course of action is to complete the contact form at the bottom of this guide and an experienced adviser will call you back to discuss your financial objectives and then recommend a product that best suits your needs.
UK’s largest REITs
According to Smart-CRE the top 5 largest REITS in the UK (* Data available on and up to 24/08/2023) are:
Land Securities Group PLC – £5.2 billion.
British Land Company PLC – £4.1 billion.
Unite Group PLC – £4.0 billion.
Tritax Big Box REIT PLC – £3.0 billion.
Should I invest in REITs?
Deciding whether REITs are right for you depends on your individual financial situation and investment goals. As one of the UK’s leading alternative investment specialists, we recommend consulting with an advisor to discuss your unique circ*mstances and objectives. Contact us to get personalized advice on REIT investments.
REIT Investment UK
NCL was conceived having identified a need for professional investment solutions, specifically tailored to the needs and requirements of High-Net-Worth investors.
We have established an extensive base of clients and investment providers, recognising a gap in the market for professional advocates to introduce HNW individuals seeking investment opportunities to high-calibre companies.
It is self-evident that the ‘one size fits all’ approach is unsuitable for the average investor, for that reason, our initial focus is on identifying individuals’ unique requirements.
If you considering REIT investment or any other vehicle please contact us for free impartial advice.
