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Is this the best way to invest in UK property dividends?

Image: British Land: Fair use

Property is considered by many to be the safest asset class around with the most predictable returns. However, investing in property requires a large capital payment upfront, which many would-be buyers just don’t have. What’s more, managing a property as an investment can be time-consuming and margins are slim.

But there’s another option available: real estate investment trusts. 

The REIT option 

Real estate investment trusts or REITs are different to normal stocks as they’re essentially property partnerships with 90% of the tax-exempt profit from the REITs’ property rental business having to be distributed to shareholders. This is known as a property income distribution, or PID. PIDs are taxable as property letting income and are taxed at 20% rather than the basic dividend rate. If held in an ISA no tax is paid, so investors receive a profit boost as no tax is paid at either the corporate or individual level. 

This beneficial tax treatment is just one of the many advantages REITs have over traditional property. Exposure to sectors that investors wouldn’t otherwise be able to access is another. 

Well diversified 

Assura (LSE: AGR) offers investors exposure to the highly defensive healthcare property market. With an investment property portfolio of £1.2bn and a loan-to-value ratio of 34%, the company is both well diversified and not dependent on debt. Also, there’s plenty of financial headroom for further growth through bolt-on acquisitions. 

At the end of September, the company reported a net asset value of 47.2p per share and hiked its first-half payout by 10% to 1.1p. City analysts expect the company to yield 4.4% this year. 

Primary Health Properties (LSE: PHP) is another REIT that invests in modern primary healthcare premises. Over the past five years, the firm’s revenue has more than doubled and management continues to invest in growth. 

The company already has 298 assets across the UK and recently acquired two more Scottish facilities for £7.2m. The firm’s net asset value per share is 90.4p and City analysts have pencilled-in a dividend yield of 4.9% for 2017. 

Buying at a discount 

Another benefit of using REITs to invest in property is the ability to buy REIT units at a deep discount to the value of the property owned by the firm. 

For example, at the time of writing British Land (LSE: LAND) is trading at 586p, down 20% over the past 12 months. However, over the same period, the value of the company’s underlying property portfolio has hardly budged. At the end of November, the company reported its net asset value per share was 891p, a full 52% above the current price. 

As one of the UK’s premier property companies, this discount to net asset value seems unwarranted. City analysts believe British Land will yield 5% this year. 

The bottom line 

All in all, investing in REITs is a much better alternative to investing in property directly. REITs offer more diversification, have tax advantages if held in an ISA, can be bought at a discount to net asset value and managements does all the hard work for you. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.