Investing in property is a national obsession in the UK, and any way we can make that easier for investors to achieve gives us warm feelings inside.
That’s why today we’re talking about investing in property through REITs (Real Estate Investment Trusts), what they are, how you can invest in them, and whether it’s ultimately the right thing for you.
The most obvious way to invest in property would require you to raise a huge deposit of at least £20,000 to buy one house or commercial unit on a mortgage. An investment in the most popular UK REIT on the other hand can be achieved for about £6.50.
Knowing how to invest in property is a major gap in many investor’s knowledge, and any properly diversified world portfolio should have at least some exposure to bricks and mortar.
How do you get started invested in REITs? Let’s check it out!
Editors note: Don’t forget to check the Offers Page and grab free shares worth up to £200 plus £50/£75 cash backs when you open new investment accounts through the affiliate links there – including alternative ways to invest in Property!
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Equity REITs
This article is about Equity REITs, which is the type that normal people can buy into without needing to be well connected or a millionaire.
An equity REIT is a Real Estate Investment Trust – a company that you can buy shares in – and that company owns (and in most cases operates) income-producing properties.
The types of property within a REIT are generally commercial property such as offices, apartment buildings, warehouses, hospitals, shopping centres and hotels.
Also, within the past 3 years there have been a number of UK Residential REITs listed on the London Stock Exchange.
These investment vehicles offer an easy and diversified route to investing in residential property, as an alternative to Buy-To-Let, targeting returns of 8% plus!
How REITs Make Money
REITs own properties which they lease out to other businesses, collecting rent. In this way the company generates income which is then paid out to shareholders in the form of dividends.
REITs must pay out at least 90 % of their taxable income to shareholders by law—and most pay out 100%!
How to Invest in a REIT
Because equity REITs are public limited companies, you can buy shares in them just like any other company on the stock market – and there are some sweet buys out there right now.
Two of our favourite UK REITs on the FTSE are British Land (BLND) and Tritax Big Box (BBOX).
British Land is a London-centric portfolio with a 5.5% dividend which looks sustainable, while warehouse behemoth Tritax offers a 4.5% dividend and includes as commercial clients the likes of Tesco, Unilever, and even Amazon.
Those massive warehouses you see on the side of motorways? Likely to be owned by Tritax!
Regular followers of Money Unshackled know that we like to do our investing via ETFs where possible, to maximise diversification and minimise fees. Well, you’ll be please to know that REITs are available via ETFs!
REIT ETFs
Exchange Traded Funds are collections of shares, usually highly diversified, that trade on a stock market like a company, meaning you can buy shares in it.
When you buy a share in an ETF of REITs therefore, you are buying in one transaction into multiple REIT companies, which in turn each own multiple commercial properties. Ultra, ultra-diversified property investing!
The top UK ETF for commercial property REITs in our opinion is the iShares UK Property UCITS ETF (IUKP), which includes – amongst many others – holdings in both British Land and Tritax REITs.
iShares is in our opinion one of the two best ETF providers in the UK alongside Vanguard, and tend to keep fees low. This ETF has a distribution yield of 2.95% and has returned total gains on average of 8.7% per annum over the last 10 years.
As an ETF it has an ongoing charges fee, which as a property fund is higher than a typical ETF which invests in normal stocks: at 0.4%. We assume this reflects the lower demand for REITs and the higher complexity of this type of fund. Expensive – but we think, a price worth paying.
This ETF is available on our favourite zero-fee trading apps Freetrade and Trading 212, and you’ll find links to set yourself up on these platforms on the Offers page. Use these links to get a free share on sign-up!
Residential REITs
Most REITs invest in commercial property, big office blocks and warehouses used by big companies. A little-known fact is that there are now a few REITs that deal specifically with residential properties.
Residential properties are houses and apartments like the one you live in, rented to ordinary people who live there and pay their rent to a property company.
As we alluded to above, there are now a number of UK Residential REITs listed on the London Stock Exchange.
These alternatives to Buy-To-Let are in some cases targeting returns of 8% plus, without any of the stresses that come with being a landlord.
The Residential Secure Income REIT (RESI) gives shareholders exposure to UK house price movements combined with steady rental income streams.
Returns are passed to you, the shareholder, in the form of a target annual 5% dividend and total returns expected to exceed 8% per annum.
UK Residential REITs vs Buy-To-Let
The returns on Buy-To-Let are still way better. This makes sense from an effort-in/return-out point of view, as buying a few quid’s worth of REIT shares is far simpler than saving a £20,000 deposit, project managing a renovation and sourcing and managing tenants.
But the main reasons Buy-To-Let gets better returns are Leverage, and that they are Undiversified. Let’s take leverage first.
Leverage
A standard Buy-To-Let will be financed 75% by debt – a mortgage – with a 25% deposit from the buyer. This means that any growth in the property value will be multiplied by 4 in returns to the investor.
A £100,000 rental property that grows by 2.5% to £102,500 is a return of £2,500; that is, £2,500 return on the £25,000 deposit the investor actually paid for the house. A 10% return – and that’s before rental income profits, which could easily be another 10% on top.
Interestingly, the Residential Secure Income REIT aims for a 50/50 debt to equity ratio, so profits should still be leveraged – but in this case only by a factor of 2.
Diversification Averages Out Returns
Diversification from a REIT means you are getting the returns from many average properties. A properly researched Buy-To-Let that you’ve put some effort into setting up yourself could easily make you better than average returns.
However, you have the risk that it is a single unit; and could yield zero rental income if the property were empty.
Tax Benefits of REITs
Taxes on Buy-To-Lets are varied and can be in many ways manipulated to suit your own personal circumstances, but REITs have some tax benefits too.
REITs benefit from a benign tax regime. For example, UK REITs don’t pay corporation tax or capital gains tax on their gains from property investments!
Rather, investors are taxed on the distributions as profits of a UK property business, treated as income tax rather than as a normal dividend receipt – typically taxed before you receive it.
Considering dividends from normal companies are always after-corporation-tax, REITs being able to avoid being taxed pre-dividend is a win for most investors.
Getting Started
Understand the specific REIT ETFs and individual commercial and residential REITs we’ve reviewed and get started by adding this asset class to your portfolio – and why not get started investing in UK property ETFs on a zero-fee platform like Freetrade – and get a sign up bonus on when you use the link on the Offers page. And while you’re there, check out other ways to invest in Property like Loanpad, who’ll give you a £50 sign up bonus when you use our partner link. You’re welcome.
