by Ben Luxon July 11, 2019 4 min read

An REIT (Real Estate Investment Trust) is a commercial portfolio of real estate investments. The trust allows individuals to buy shares in portfolios and receive income paid out to them as dividends. However, this isn’t an ordinary company share. 

REITs were first established in the US in 1960 and over the years have been recognised internationally as a valid investment vehicles.

The property that can be included in an REIT may include everything from apartment buildings to health care facilities, to infrastructure (cell towers, energy pipelines etc.).  

Because of the broad array of potential real estate to invest in, most REITs specialise, focusing their time and energy on a particular segment. This allows them to maximise returns instead of spending all their time researching the vast horizon of real estate possibilities.

However, this isn’t to say that REITs can’t be diverse and specialty REITs often hold various types of property in their portfolios to mitigate potential risks associated with having too narrow an investment focus.

Don’t put all your eggs in one basket and all that.

The UK turned up a little late to the party, only passing REIT legislation in 2007. The qualifying criteria for REIT status varies depending where you are. But in the UK a company must: 

  • Invest at least 75% of its assets in property. 
  • Earn at least 75% of profits from property rent, interest on mortgages or from property sales. 
  • Pay out at least 90% of taxable income as dividends to shareholders. 
  • Have no more than 50% of its shares held by 5 or fewer shareholders. 
  • In the UK, the property rental business must include at least 3 properties and no single property may account for more than 40% of the same.

In exchange, REITs benefit from a benign tax regime. For example, UK REITs don’t pay corporation tax or capital gains tax on their property investments, unlike less efficient, older vehicles such as property companies and Property Unit Trusts. As a result, 80% of old school UK property companies (by value) have converted to REITs according to the British Property Federation. 

REITs in the UK

Why invest in REITs instead of directly in property?

There are a number of advantages to investing in an REIT which make them very appealing as potential investments - at least on paper.

Let’s dig a little deeper.

First, REITs are highly liquid. Whereas when you purchase a property it could take months, or even years to sell the property, with an REIT you can trade your shares on the stock market just like any other stock or share.

As any homeowner can attest, illiquidity can be a real problem, especially if you need to get your cash out quick.

Second, as a pooled investment, you are buying shares in a diversified portfolio, not a single property. What this means is that risks are mitigated against the rest of the portfolio. If you invested in single property all the risk would be associated with that one investment property. 

Thirdly, you can invest as much or as little as you want. When purchasing a property yourself there is a high monetary barrier to making that first investment which stops a lot of people from ever investing in the real estate market and getting the returns that that entails. With an REIT that barrier is removed. 

Finally, you don’t need expertise in planning, financing, development, maintenance or tenant management, that come with running a rental property or portfolio of rentals. 

REITs UK

Types of REITS

Not all REITs are the same. There are various classifications which indicate the type of business they do and can be further classified depending on how their shares are bought and sold.

Equity REITs 

This is the most common form of REIT. These buy, own and manage income-producing real estate. For example, revenues come primarily from rent rather than the reselling of the portfolio.

Mortgage REITs

These are known as mREITs. They lend money to real estate owners and operators and collect profits through interest returns. The lending may be either directly through mortgages and loans or indirectly through the acquisition of mortgage-backed securities (MBS). MBS are investments holding pools of mortgages issued by government-sponsored enterprises (GSEs). Due to the mortgage-centric focus of this REIT, they are potentially sensitive to interest rate increases.

Hybrid REITs 

Hybrids hold both of the aforementioned assets, both rental properties and mortgage loans. 

Publicly Traded REITs 

These REITs offer shares of publicly traded REITs that list on a national securities exchange, where they are bought and sold by individual investors. They are regulated by the U.S. Securities and Exchange Commission (SEC).

Public Non-traded REITs 

Like the publicly traded REITs these are also registered with the SEC, but don’t trade on national securities exchanges. As a result, they are less liquid than publicly traded REITs but tend to be more stable because they’re not subject to market fluctuations.

Private REITs

Last on the list are not private REITs which are not registered with the SEC and don’t trade on national securities exchanges. They work solely as private placements selling solely to a select list of investors.

REITs UK

Pros and Cons of Investing in REITs

Pros

  • Liquidity
  • Diversification/Counterweight to other assets
  • Transparency
  • Steady dividends
  • Risk-adjusted returns

Cons

  • Low growth/Little capital appreciation
  • Non-tax-advantaged
  • Subject to market risk
  • High management and transaction fees

The 10 biggest real estate ETFs in the Market

The table below rounds up the biggest property ETFs available to European investors. You can use the below chart comparison and detailed comparison tools to assess your choices according to key indicators.

Fund Name

Fund CCY

Fund size

(in m £)

TER in % p.a.

1 year in %

iShares Developed Markets Property Yield UCITS ETF

USD

2,261

0.59%

6.80%

iShares European Property Yield UCITS ETF

EUR

1,152

0.40%

-1.53%

iShares UK Property UCITS ETF

GBP

610

0.40%

-7.75%

iShares US Property Yield UCITS ETF

USD

499

0.40%

10.74%

SPDR Dow Jones Global Real Estate UCITS ETF

USD

449

0.40%

5.43%

Xtrackers FTSE EPRA/NAREIT Developed Europe Real Estate UCITS ETF 1C

EUR

392

0.33%

-2.96%

iShares Asia Property Yield UCITS ETF

USD

298

0.59%

6.58%

HSBC FTSE EPRA/NAREIT Developed UCITS ETF USD

USD

120

0.40%

6.45%

SPDR FTSE EPRA Europe ex UK Real Estate UCITS ETF

EUR

60

0.30%

-0.69%

iShares MSCI Target UK Real Estate UCITS ETF

GBP

53

0.40%

-3.61%

Ben Luxon

"Ben is an author and real estate enthusiast. His interest in all things entrepreneurial has led him to work with real estate professionals all over the world, distilling their knowledge into articles and Ebooks. His love of travelling has taken him to over 10 countries in the last year, where he has sampled the craft beer of them all."


Leave a comment


Also in Articles

Getting Great Property Photography that Attracts Renters Quick
Getting Great Property Photography that Attracts Renters Quick

by Danielle Mason August 14, 2019 5 min read

Renters, when looking at properties online will often make snap decisions in seconds based solely on the images available. That’s why having the very best possible photographs of your property is so important.
Read More
How to List your Properties Online and Fill your Rental for Free
How to List your Properties Online and Fill your Rental for Free

by Danielle Mason August 07, 2019 7 min read

In this article we outline some of the best free websites to list your rental on. Plus, we explore some more out of the box listing ideas too...
Read More
How is Rental Income Taxed? - UK
How is Rental Income Taxed? - UK

by Ben Luxon July 31, 2019 6 min read

When it comes to working out your taxes at the end of the year things can get a bit complicated. What counts as rental income? What are expensable? What tax bracket are you now in? We could go on and on. So, we thought we might see if we can't make it all a little bit clearer for you.
Read More