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Capital at risk. The value of your investments can go up and down, and you may get back less than you invest.
There are several reasons you might consider investing in property. While restrictions are tightening around buy-to-let, property could still provide a regular income from rental payments and create the opportunity to benefit from capital growth if property values rise.
But investing in property also has potential downsides. As with any form of investment, the property market comes with no guarantees in terms of financial performance. Plus, not everyone can afford to buy a property for investment purposes. And even if they can, property tends to be an ‘illiquid’ asset, meaning it can be difficult to sell quickly at a fair price.
If property investing still appeals but the idea of becoming a landlord sounds like too much hassle, or if drumming up a deposit and mortgage repayments are beyond your means, another option is to consider property investment funds, including real estate investment trusts – REITs.
What is a REIT?
A REIT is an investment fund that aims to generate a return from property investment. To qualify as a REIT in the UK, the fund must own commercial or residential property or both, or own mortgage assets (where it earns income from the interest on the debt repayments).
Shares in a REIT are listed and traded on the stock market in the same way as other company or investment trust stocks. Investors can hold REITs in an individual savings account (ISA), so there will be no tax to pay on dividend income.
A REIT allows investors to earn a return on property without having to become landlords or own and manage physical property.
Tax treatment depends on one’s individual circumstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.
How do REITs work?
Closed-ended funds such as REITs are stock market listed and trade like traditional stocks and shares, meaning they can be traded throughout the day and making them a relatively liquid asset. Property itself will be viewed as ‘illiquid’ if it is difficult to sell quickly at a fair price.
When investors want to sell large amounts of their holdings in open-ended property funds, it’s sometimes the case that buildings owned by the fund have to be sold to generate the necessary cash.
It’s this characteristic that has made open-ended property funds something of a concern for the UK financial watchdog, the Financial Conduct Authority (FCA) in recent years.
This is because the illiquid nature of buying and selling large buildings means investors can be locked into a fund while they wait for managers to sell off one or more buildings. This process can take months, or even years, leaving investors unable to access their cash.
In contrast, closed-ended funds issue a set number of shares, so once these are all in circulation, investors can trade them on the market as they would any other stock.
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Why invest in property?
There are several reasons why it’s generally worth thinking about investing in property:
- Capital growth: as property prices rise, so the return increases on an initial investment. Should prices fall, however, an investor would lose money if they had to sell when the value of the property was ‘under water’, that is, worth less than the original price
- Rental income: a tenant paying rent on a property provides would-be landlords with a steady income stream often secured for long periods (potentially several years at a time)
- Diversification: property tends not to perform in line with other assets such as bonds or stocks and shares. It is said to be ‘non-correlated’ and can therefore complement the performance of an existing basket of assets.
How to invest in REITs
You can invest in a REIT in two ways: buy shares directly in the REIT through a broker, or buy an exchange traded fund (ETF) that tracks the performance of an index of REITs.
An ETF is a passive investment that tracks an index, such as a basket of REITs, to give the investor diversified exposure to a particular sector or type of investment. ETFs are traded on the stock market in the same way as stocks and shares.
To buy either shares in a specific REIT or shares in an ETF you can use an investment platform or app or an investment broker.
You’ll need to register with the provider first and open an account. Always check what fees and charges will apply on your investment, plus any minimum account funding requirements, to ensure it suits your needs.
What sort of property?
Some property investors, such as ‘buy-to-let’ investors, favour investing in residential property, such as student flats. But the buy-to-let market has been hit by a series of tax and regulatory changes in recent years, which have caused many landlords to sell up. Other investors have been left questioning whether this investment is still worth it.
Bear in mind, this information is not intended to be, nor does it constitute, any form of tax advice.
Commercial property, on the other hand, offers would-be investors exposure to a different part of the bricks and mortar landscape.
There are three main types of commercial property:
- Industrial: business parks, industrial estates, factories and warehouses
- Office: such as blocks leased out to businesses
- Retail/leisure: shopping centres, high street premises, entertainment and holiday parks.
Although they are able to generate large amounts in rental income, commercial properties such as those outlined above are often far more expensive than residential buildings to buy outright, usually costing millions of pounds.
As such, direct exposure to this sector through purchase is beyond the pockets of most private investors, so the main option is to buy into commercial property funds.
Types of commercial property fund
There are two main types of commercial property investment vehicle: direct and indirect funds.
Direct property funds are run by professional investment management firms where money is pooled from potentially thousands of investors in order to buy a range of different buildings.
Doing this helps provide diversification. It means that if one or more properties within a portfolio are unoccupied for a period of time, the others are still able to provide a rental income for the fund.
Indirect property funds invest in the shares of firms that operate in the property and property development sector. Their performance, therefore, tends to be more closely connected to the wider market for stocks and shares.
For flexibility, there are also funds that employ a hybrid approach that enable investors to invest in both direct property and in property-related securities.
Benefits and risks of investing in REITs
Some of the benefits of investing in REITs include:
- diversification of portfolio: REITs offer a way to get exposure to property markets, without having to buy and manage property yourself. It also means you can invest in property markets with a small amount of money (many investment platforms have a minimum requirement of £50 or £100 a month, for example)
- earn a regular income: many REITs are fairly consistent in the income they pay to investors
- no property market expertise needed: while you will want to research the best REITs for your investment goals and strategy, you won’t need detailed expertise in different property markets to get started
- tax efficient: REITs can be held in an ISA or SIPP.
Be mindful, this information is not intended to be, nor does it constitute, any form of tax advice
Here are some of the risks of REITs, which you’ll want to consider before investing:
- investments can be volatile: property markets can be volatile and as with any investment, external factors can play a big part in their performance. For example, property markets were hit badly by the covid-19 pandemic, particularly when commercial office space was unused for long periods. Investors can make significant losses
- interest rate risks: REITs can be particularly sensitive to interest rate changes, as property and mortgages are linked to interest rates when paying debt. Increases to interest rates can affect the underlying value of the property investments.
How are property funds structured?
Property funds are either ‘closed-ended’, such as real estate investment trusts or REITs (see below), or as ‘open-ended’ investment funds including unit trusts or open-ended investment companies (OEICs).
An OEIC is incorporated as a company and issues shares. Unit trusts represent a pooled sum of money that’s been structured as a trust and which issues units to investors.
The financial value of the units or shares in a unit trust or OEIC increases or decreases based on the value of the assets which underpin the funds.
What types of REIT are there?
REITs often specialise in a particular area of the property market including:
In the UK, a REIT must own commercial or residential property and rent it out. At least three-quarters of its profits must come from rental income.
In addition, a REIT must also distribute at least 90% of the profits it makes from this business to shareholders. The companies that qualify as REITs pay no corporation tax on either profits or gains from their UK-qualified property rental businesses.
Instead, shareholders pay income tax on the distributions they receive. These are technically known as ‘property income distributions’, but they do not count as dividends in the same way as payouts do from other listed companies.
This makes REITs a potentially tax-efficient way to invest in property. First, they leave retail investors free to use their dividend tax allowance, which is the amount from dividends an investor is allowed to earn tax-free each year, on other investments. Although for the 2024-2025 tax year the dividend allowance was halved to £500, where it remains for 2025-2026.
In addition, if you hold REIT shares in an individual savings account (ISA) or private pension such as a self-invested plan, both of which shelter investments from tax, there will be no income tax to pay on the distributions you receive.
What are the UK’s largest REITs?
REITs are broadly regarded as the backbone of the listed property sector.
They fall into two main categories. The first comprises businesses that could be described as property trading companies – most listed property companies, including the property developers British Land (BLND) and Land Securities (LAND), opted for REIT status once the regime was introduced in the UK.
Other REITs effectively collective investment vehicles, operating in a similar way to an investment trust, but with a focus on the property market rather than overseeing a large basket of stocks and shares from a variety of sectors.
The UK’s largest REITs are worth billions of pounds as measured by their market capitalisation (see Table 1 below). Market cap is calculated by multiplying the number of shares in circulation by the share price.
REITs are relatively easy to buy and sell via an online trading platform.
REITs can be specialist in nature and do not necessarily offer broad property exposure in the style of more traditional property unit trusts and OEICs. Interest in REITs will also ebb and flow subject to the bricks and mortar requirements of the day.
For example, interest in retail outlets waned significantly during pandemic lockdowns and at the height, while the need for warehouse space has risen on the back of the e-commerce boom.
Should I invest in REITs?
The London Stock Exchange describes REITs as a “way for investors to access the risks and rewards of holding property assets without having to buy the property directly”.
To this end, an investor with existing exposure to shares, bonds and cash looking for extra diversification could consider property in general and REITs in particular as a means of achieving this.
It’s worth remembering, though, that REITs come in a variety of shapes and sizes each with their own risk and reward characteristics.
On the one hand, British Land, Landsec, and AEW UK Reit (AEWU) could be regarded as generalist players because they don’t focus on one kind of property, preferring to spread their interest across several areas.
Investing in a specialist REIT means restricting yourself to a particular niche within the property sector. For example, you might think there is potential in the warehouse market, and there are several REITS which satisfy this need. For example, Tritax Big Box (BBOX) owns large warehouses let out on long leases to international companies in regional areas.