An introduction to REITs

This guide is intended to give a brief overview of Real Estate Investment Trusts (REITs) and the different ways to invest in them. You’ll also find a list of resources and links for further information and reading.

This guide is not intended as advice and you should always remember that the value of investments can go down as well as up. If you need advice on where to invest, Reita strongly recommends you visit an independent financial adviser (see links below).

What is a REIT?
Background to REITs
Why were REITs introduced in the UK?
Why should you invest in REITs - potential benefits
What are the potential downfalls of REITs?
Overseas REITs
REITs vs investing directly in property
How to invest in REITs
10 facts about REITs
Risk warning
Further reading and resources
Find an adviser

What is a REIT?

A Real Estate Investment Trust (REIT) is a property investment vehicle that benefits from certain tax advantages. A REIT is, by definition, a company that’s listed on a regulated investment exchange such as the London Stock Exchange and which owns income-producing property – either commercial or residential.

REITs were first launched in the UK on 1 January 2007 as a way of making it easier for investors to invest in UK commercial property, such as offices, high street shopping centres and out-of-town retail parks.

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Background to REITs

Before REITs were launched in the UK, quoted property companies suffered from a type of double taxation; first, companies had to pay corporation tax and secondly, investors had to pay tax on their share dividends. It was felt this put property companies at a disadvantage as compared with investing direct (eg buying a buy-to-let property) where there was only one taxation charge, ie where investors paid tax on rental income.

REITs were therefore set up with a number of rules in place, in return for which the companies became largely exempt from corporation tax. A principle qualifying requirement is that at least 90% of the company’s taxable income is distributed to shareholders through dividends.

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Why were REITs introduced in the UK?

The Government was keen to support opportunities that would help more people invest in a wider range of property investment that hadn’t been available to them before, particularly in the commercial property sector. Introducing REITs meant removing taxation as a factor unduly affecting the choice between direct and indirect property investment. Investors would also be able to buy and sell their interests easily (having the benefit of liquidity) and invest in a diverse variety of properties, as opposed to putting all their cash into, say, one buy-to-let property.

In introducing UK REITs the Government also hoped to further encourage retail investors by allowing REITs to be held in tax-sheltered personal finance wrappers, such as ISAs and SIPPs.

As a knock-on benefit, it’s hoped that a greater demand for commercial property investment may lead to a decrease in the amount owned by occupiers. The expectation is that the transfer of commercial property by businesses for which property holding isn’t a core activity, to specialist property managers will enable more effective use of the UK’s property stock.

Other investors in UK REITs are likely to be pension funds and insurance companies, as well as mutual funds. These institutional investors are likely to use REITs both to replace direct property investment and to use REITs in place of cash where they need to maintain liquidity.

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Why should you invest in REITs - potential benefits

The introduction of UK REITs means small investors are now able to invest indirectly in a truly diversified property portfolio, buying low cost and easily tradable units, instead of having to purchase, say, entire properties.

A major advantage of UK REITs is their tax-efficient nature. Investors avoid the double taxation that any investor in property company shares faces, as tax won't be payable on rental or capital gains earned within a REIT (as the REIT organisation is exempt from corporation tax on qualifying property income and gains). Investors will only be liable for the tax due on income received as dividends.

Because UK REITs pay out such a large portion (90%) of their profits in dividends, they're also particularly attractive to income-seeking investors.

Without the challenges associated with the current double taxation regime, UK REITs may differ from existing quoted property companies in that their prime focus may be less about capital growth than maximising shareholder dividends.

Key benefits for investors

Tax transparency (tax payable only on income dividends)
Regular and potentially high-yield returns
Access to property investment for minimal outlay
Portfolio diversification (low correlation to equities and bonds)
Liquidity - easy to buy/sell
Lower transaction costs compared to buying property directly (stamp duty on direct property is up to 4%, whereas buying shares in a UK REIT will only be subject to stamp duty of 0.5%)
Access to property investment in a variety of sectors and geographical locations
Strong corporate governance

What are the potential downfalls of REITs?

The major concern about investing in REITs as a means of gaining exposure to the commercial property market is their correlation to equities. Because REITs are stock market listed companies, the performance of their shares is inevitably affected by the performance of the market. In the short-term, ie over periods of less than 18 months, the performance of REITs shares is likely to be more closely correlated to that of other shares than it is to that of commercial property. Having said that, commercial property, whether direct or indirect, should be considered for long-term investment rather than short-term speculation.

Like any investment, the value of a REIT can go down as well as up and past performance isn’t necessarily an indicator of future performance. If you are looking for advice on where to invest, Reita would always recommend seeking independent financial advice from an investment professional.

find independent financial advice near you

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Overseas REITs

REITs already exist in 22 countries, including Holland, France and Belgium, the US, Australia and Asia. The US has had REITs since the early 1960s and the most recent country to introduce them is Germany, in June 2007. So, the introduction of UK REITs in January 2007 was partly about aligning the UK with other key international markets such as the US and Japan.

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REITs vs investing directly in property

One of the big questions people have about property investment is, is it better to invest in a bricks and mortar properties, or spread your investment over managed properties.

As well as the tax advantages, UK REITs offer several investing benefits which are not available to those investing directly in bricks and mortar properties:

At least 90% of the net rental yield (minus some management charges) from a portfolio of property investments should flow through to shareholders as this is one of the conditions of a UK REIT

Rather than owning a single property in its entirety, an investor in a UK REIT would own a piece of a professionally managed property portfolio

UK REITs offer greater liquidity than buying a house, which can be time consuming and expensive to sell; whereas it is usually easy to buy and sell shares in a property fund

Through a UK REIT, an investor may have access to parts of the property sector previously unavailable to them. For example some of the more attractive, high-yielding properties, such as industrial buildings and shopping centres, are beyond the reach of most private investors

Investing in UK REITs offers the potential for a diverse portfolio of real property assets in a variety of sectors and geographical locations

How to invest in REITs

Essentially you can invest in a REIT either by buying shares in that company through a stockbroker, or share trading platform, or though a fund that itself invests in REITs. These funds can be specialist REIT funds or funds that invest both directly into commercial property and in REITs.

Before investing in REITs you need to be sure this investment is right for you. You may wish to seek independent financial advice to consider how REITs might fit within your investment portfolio. As everyone's personal circumstances and risk outlook varies, it's critical that you fully understand all the risks involved before deciding whether REITs could be right for you.

Reita strongly advises that individual investors talk to an investment professional such as an Independent Financial Adviser or a financial broker. Please note that as REITs are classified by the FSA as ‘shares’ many IFAs will only be able to advise you on holding REITs within a fund.

find a private stock broker or independent financial advice near you

To get more information on how to access REITs you can download our fact sheet – REITs and how to invest in them

download fact sheet

For a list of all the current UK REITs with company information, visit our UK REITs page

see all UK REITs

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10 facts about REITs

REITs are a new type of property investment vehicle which were launched in the UK on 1 January 2007. Similar bespoke property investment vehicles are already successfully operating in other key markets including US, Australia, Belgium, Canada, Singapore, Japan, Germany and France.

For individual investors, the main advantages of UK REITs are: liquidity - the ability to buy and sell quoted investments like a REIT easily and with relatively low charges; high income-distribution, a spread of investments and tax transparency.

UK REITs will enable retail investors to invest in property without many of the risks associated with owning a single building and without the challenges associated with managing tenants.

The UK REIT must distribute to shareholders at least 90% of its profits from tax-exempt property rental business.

The current problem investing in stock market listed property companies is that investors effectively pay tax twice on the same income - first, when the company pays corporation tax on its profits, and again when the investor receives a dividend. By contrast, there will be no corporation tax on gains arising from the disposal of properties forming part of the tax exempt business of a UK REIT.

The advantage of UK REITs as compared with unit trusts and open-ended investment companies (OEICs) is that the liquidity challenges associated with property mean that for the latter pair a significant proportion of funds held cannot be directly invested in property (in case investors want to sell). Liquidity is not an issue with UK REITs, since investors can buy or sell easily tradable units.

Existing property companies and groups wishing to convert to UK REIT status will pay a conversion charge of 2% of the market value of their rental properties (worth £1.6bn as at July 2007).

A UK REIT must be a fully listed company (AIM listed companies are explicitly excluded) and it must be resident in the UK for tax purposes.

UK REITs' shareholders will be permitted to hold their shares in tax-efficient 'wrappers' like ISAs, SIPPs, PEPs or child trust funds, as well as personal pensions.

Investing in commercial property has long been an effective tool to diversify larger portfolios. UK REITs enable individual retail investors to invest in diverse property portfolios, without the double taxation hurdles associated with buying shares in stock market quoted property companies.

Risk warning

Please remember that, as with any financial investment, the value of property investments can go down as well as up and past performance isn’t necessarily an indicator of future performance. If you are unsure about any investment or financial decision, you should seek expert independent advice.

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Find an adviser

To get advice on where and how you should invest, we strongly recommend you seek financial advice from a professional adviser near you.

find an adviser near you

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