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.
REITs give you a way to have the benefits of owning property assets (growth, income etc) without actually directly buying property.
REITs allow anyone to own or finance properties. In the same way shareholders benefit from owning stocks in other companies, the stock holders of a REIT own a share of the income produced through real estate investment.
So it’s like owning shares in any other company. It’s just that this company is one that invests in property and that’s how it makes its money.
To be eligible to be a REIT, a company has to
- be tax resident in the UK
- have at least 75% of its assets and gross profits in property rentals
- have at least three property rentals with no single property representing more than 40% of the total value
In the UK, a company or group can apply for UK-REIT status, which is highly sought-after because REITs are exempt from corporation tax on profits and gains from their property rental business (handy). This costs them 2% of the market value of their rental properties but on balance it’s worth it.
Once it is qualified, a UK-REIT must share at least 90% of its taxable income to its investors. This means that you should get at least some of the profit every year (assuming the company does well).
REITs allow people to invest in large-scale, income-producing property – the sort of properties that you or I probably couldn’t afford on our own, even with a mortgage. 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 – 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 – Mortgage REITs can involve both residential and commercial property. Mortgage REITs get most of their profits from interest earned on their investment through mortgages.
A REIT can be invested in directly by buying its shares, or indirectly through a collective investment scheme such as an authorised Unit Trust (AUT) by buying units in a scheme which invests in REITs. REITS can also be invested in through tax wrappers such as ISAs or through a Self-invested Personal Pension (SIPP).
As with other shares, you can buy shares in REITs with a share-dealing account. If you have a SIPP with, say Hargreaves Lansdown, you can add REITs to it through their share dealing service. Similarly, you can put REITs into a self-select ISA. To see which ISA or account works best for you take a look at our comparison pages here.
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.
- UK-REITs are listed on the Main Market or AIM which is a smaller market than the FTSE, but it still enjoys many of the advantages of the UK equity markets
- REITs enable ordinary investors to invest in the kinds of properties that would otherwise be too expensive for them to buy on their own.
- As REIT shares are part of the stock market, 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 that many REITs has fluctuated wildly in some cases. In the years since the crash, for example, commercial property has done particularly badly as companies have folded and vacated offices and factories. This has had a bad impact on many REITs and they’re only now beginning to recover.
- 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.