REITs have become a portfolio staple for income investors over the past decade, but what exactly are REITs? Why are they becoming more popular? and how can you invest in REITs? To find out the answers to all those questions and more read our article on how to invest in REITs below.
Real Estate Investment Trusts (REITs) are a portfolio staple for savvy investors. But what are they, how do they work, and should you invest in them?
Here’s everything you need to know about investing in REITs – including an easy and quick guide on how to buy REIT shares.
A Real Estate Investment Trust (REIT) is a company or group that owns and manages property on behalf of shareholders (which is anyone that owns shares in the trust – that could be you!).
REITs mean you can benefit from owning property assets without buying property yourself. Your money is pooled in the fund with other people’s investments, so it’s not like you need to raise a huge deposit and mortgage to invest a buy-to-let house, for example.
Instead, you get a share of the benefits like growth, income, and capital value of property sales – minus, of course, management fees.
A REIT is a type of stock – it’s just the shares are invested in property. It’s not just residential property either – your fund might manage offices, commercial retail outlets, warehouses, or hotels.
To be eligible to be a REIT, a company has to
• Be tax resident in the UK
• Not be an open-ended investment company
• Be listed on a stock exchange (not AIM)
• Distribute at least 90% of profits (usually as dividends)
• Have at least 75% of its assets and gross profits in property rentals
• Have no outstanding non-commercial loans
• Gain rental income from at least three properties – and no more than 40% income from a single property.
As you can see, the regulations of REITs are pretty strict! There are lots of other rules, too, depending on the type of REIT set up. However, the ones listed above are the minimum regulations that must be met.
UK-REIT status is still fairly new compared to other international markets. The scheme launched in 2007 and amends in 2012 helped more companies access the scheme (without compromising on tight regulatory requirements).
They’re an attractive option for any company using property as a major asset. This is because they are exempt from corporation tax on profits and gains from a rental business. It comes at a price – 2% of the market value of their holdings – but that’s still far less than a potential corporation tax bill!
A UK-REIT must distribute at least 90% of its annual taxable income to investors. That means you, as a shareholder, could see returns every year the company profits.
Property assets that a REIT may hold can include:
• office buildings
• shopping centres
• self-storage facilities
• mortgages or loans
REITs usually fall mainly into two categories – Equity REITs or Mortgage REITs:
• Equity REITs – Own a wide range of property types including shopping centres, offices, hotels, flats and more. Equity REITs get most of their profits from rent on those properties.
• Mortgage REITs – Hold both residential and commercial property assets. Mortgage REITs get most of their profits from interest earned on their investment through mortgages.
REITs provide a way for individual investors to earn a share of the income produced through commercial property ownership, without actually having to go out and buy commercial real estate (buildings). Here are the pros and cons as we see them:
- Investing in a REIT is a relatively hands-off approach to investing as specialist investors decide which developments are most likely to yield high profits and you get the benefits. In other words, they do all the legwork – you don’t have to go and look for the properties or manage them, you just take a share of the profits.
- The major UK REITs are many times larger than most property unit trusts so that makes them, on the whole, more solid and less volatile (although nothing is certain in this market).
- REITs are pretty transparent products, as they are subject to continual market scrutiny. So it’s harder for them to hide what they’re doing.
- REITs enable ordinary investors to invest in the kinds of properties that would otherwise be too expensive for them to buy on their own.
- REIT shares are part of the stock market, so investing in them doesn’t help you diversify your portfolio in the way that buying a property would (if you’re already an investor in stocks and shares).
- The income of REITs can vary wildly depending on the economic market.
- REITs can be very risky, particularly if they invest in a specific geographical area which could be hit by a downturn at any point. Keep an eye on that.
If you’re a hands-on kind of a person, REITs can be annoying as you are at the mercy of the intelligence – or lack-of – of the fund managers. You may feel you have a better understanding of certain types of property. In which case you should invest directly in property yourself rather than buying shares in REITs.
You need to buy shares to invest in REITs. We’ve got a thorough guide on how to buy shares here – but keep reading for a quick rundown on how to invest in REIT shares!
You can use a stockbroker or an individual online broker account to buy shares from a REIT listed on the stock exchange. A stockbroker will give you their expert opinion on the best shares to buy, but the management fees are high to reflect this hands-on approach.
You could go halfway between a stockbroker and an individual investment strategy by setting up a share dealing account on a platform such as Hargreaves Lansdown or AJ Bell. They have pre-selected investment suggestions but lower management fees than an individual stockbroker.
Setup your own investing account through online platforms like Interactive Investor and eToro for more control over which shares you buy (and won’t restrict you to just buying REIT shares – you can purchase any stocks through these accounts). However, it does require more independent research on company history, performance, and investment plans to find out which ones you think are the best bet to invest your money in.
You can also look for an Authorised Unit Trust (AUT), which uses REITs as part of its collective investment portfolio. This could diversify your portfolio but will mean you have less say over which companies your money is invested in.
If you’re not sure whether REITs suit your investment plans, don’t panic! Perhaps you think they’re a bit too risky for your investments, or you want to learn more about investing in the stock market before you do anything.
Whatever your financial growth strategy (or current lack of one!), you’ll find tons of helpful information in our investment guides.