A Real Estate Investment Trust (REIT) is a corporate vehicle that owns and manages rental properties on behalf of shareholders.
Popularised in the UK about a decade ago, many listed property firms have sought – and converted – into REIT-status. Firms such as Land Securities, British Land and SEGRO (formerly Slough Estates) belong to the growing REITs club.
To become a REIT is fairly straightforward. Simply, the firm’s rental income must be its major source of profits, and the bulk of this income – 90% – must be distributed to shareholders (see government’s guidance here). This untaxed cash flow to investors will be treated as property income. A further condition for a REIT is a listing in a recognised exchange, such as the London Stock Exchange.
Why Invest in REITs?
The structure of a REIT is efficient. First, REITs offer investors access to a wide portfolio of properties at a corporate level. A REIT save investors the hassle of direct property ownership. Second, profits and gains within the REIT are tax-exempt. Third, you can buy and sell major REITs throughout a trading session, like any other stock. Investing £1,000 or £1 million in a REIT will earn a proportional amount of income. Unsurprisingly, many pensions and large investors are increasingly dependent on REITs for their yield.
Types of REITs
In the UK, most REITs belong to the ‘equity’ type. An equity-REIT may own, among others, offices, shopping complexes, apartments, student accommodation et cetera, to produce the required income for shareholders. The other major type is a mortgage-REIT, which derived its income from mortgage-related activities.
A REIT may specialise. For example, SEGRO concentrates on industrial properties and warehousing – a sector on the rise due to the popularity of online delivery.
Investing In REITs
Now this the important part. Becoming a REIT shareholder is easy. A broker account and some cash are good enough. You can even leverage up with spreadbet and CFDs. The harder bit, however, is knowing when to do so.
When investing in REITs bear in mind three points:
- The fortune of REITs is dependent on the property and economic cycles. Property values, like stock prices, can go up and down. Boom and bust is a recurring feature of the property market.
- Some property sectors are more popular than others.
- Timing is an important factor too.
Look at the long-term chart of Land Securities (LAND, yield – 5.2% ). Up – down – up – down. A REIT since 2007.
What about British Land (BLND, yield – 5.2%)? Has a roller-coaster chart pattern too. At 600p, prices are still a long long way below its 2007 peak. In fact, prices have made no significant progress since 2004, about 15 years ago. A REIT since 2007.
For retail-oriented REITs, their share prices are faring even worse. Hammerson (HMSO), for example, is crashing into new 52-week lows on bearish projections into their rental portfolio (see below). Obtained REIT status in 2007.
Where to invest in REITS?
You can compare stock brokers for buying REITs here or read up on the below providers that allow you invest in REITs through their platforms:
Should you invest in REITs?
Being a listed vehicle gives investors liquidity, but this has a cost: Amplified price swings. REITs are subjected to the ebb and flow of the stock market. So as a general rule of thumb, REITs must only be part of one’s diversified portfolio. Buying is recommended after a cyclical downturn. Use technical tools to time entry; stoploss orders are required, unless you can withstand a 50% drawdown.
If picking a successful REITs seems impossible, one should try for a REIT ETF such as iShares UK REIT (IUKP) (see ETF guide). Acquiring this ETF immediately gives investors a diversified basket of 39 REITs according to IUKP’s Factsheet.
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Jackson has over 10 years experience as a financial analyst. Previously a director of Stockcube Research as head of Investors Intelligence providing market timing advice and research to some of the world largest institutions and hedge funds.
Expertise: Global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University.