Are you missing out on Real Estate Investment Trusts?

Many investors overlook Real Estate Investment Trusts. Which is a shame, as it’s a decent way to get exposure to commercial property as an asset class, with the added benefit of useful tax break.

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Around 15 years ago, I began positioning my investment portfolio for retirement, gradually moving away from a strategy of capital growth to one of income generation.
That said, I’d begun income investing some years before that, building up a clutch of higher-yielding income stocks. But now, it was time to get serious, selling funds and index trackers and moving into investment trusts and individual stocks.

And it wasn’t long before I started adding Real Estate Investment Trusts (REITs) to my portfolio, seeing in them a tax-efficient source of stable and resilient income — and one that could often be picked up at a discount to REITs’ underlying net asset value.
I’ve not been disappointed. Today, I hold shares in almost 20 REITs — and would be quite happy to see that number grow higher.

So what is a REIT?

REITs aren’t difficult to understand. Essentially, they’re companies that hold property portfolios, from which they earn rental income.
You’ve probably heard of the two FTSE 100 behemoths of the REIT world, British Land and Land Securities, each of which holds property portfolios of £4–5bn — generally city centre office blocks, corporate campuses, and shops.
Segro is even bigger, with £13bn of property in the form of warehouses and industrial space, with some of the land on which those warehouses sit going back to the 1920s when the business was first founded.
The appeal of property as an asset class isn’t difficult to understand, and by buying shares in a REIT, we’re gaining exposure to property and the associated rental income in affordable bite-sized chunks, without the hassle of managing leases and tenants.

Tax break

REITs are even more attractive as an investment proposition when considered from a taxation perspective.
Essentially, provided that property companies meet the eligibility requirements for REIT status, those property companies are allowed to become Real Estate Investment Trusts, after which they are allowed to pay out their profits directly to investors without paying Corporation Tax.
This — particularly when one remembers that Corporation Tax is rising from 19% at present to 25% in April 2023 — is quite a boon, making REIT status highly desirable for property companies.
There are still quite a few ordinary property companies out there, but since it became possible to convert to REIT status in 2007, significant numbers of property companies have done so. And of course, many more new property companies have been established from scratch since then, and these are almost all REITs.
That said, buy a REIT and all of this is quite transparent from an investor point of view. The only difference that you’re likely to see is that instead of dividends, payments are in the form of something called ‘Property Income Distributions’ (PIDs), which arrive in your hands in exactly the same way as dividends.

In addition, some REITs pay dividends as well, as they earn profits from activities other than purely renting out property — property development, for example, and providing tenant services.

Property picks to ponder

Although I hold British Land, for me the real attraction of REITs doesn’t lie in such large generalist portfolios — particularly in the present post-Covid era, in which there’s much talk about ‘the death of offices’ and ‘the death of retail’ and so on.
Instead, I tend to favour smaller, specialist REITs — although ‘smaller’ needs some clarification: a number of my favourite specialist smaller REITs have market capitalisations over £1bn.
There’s Primary Health Properties, for instance, where the property portfolio comprises doctors’ surgeries. Warehouse REIT where the property portfolio comprises warehouses. Tritax Big Box, where the property portfolio comprises really, really, really big warehouses. Regional REIT, where the property portfolio comprises offices in the UK’s regions. Custodian REIT, where the property portfolio comprises industrial and warehousing properties — again, spread out over the UK. And LXi REIT, where it comprises a diverse mix of properties on very, very long lets.
And so on, and so on.
In short, for a decent income that should prove reasonably resilient — most of my REITs held up pretty well during the recession — it’s well worth taking a look at the world of REITs.

And when doing so, going beyond the likes of Footsie favourites British Land and Land Securities. Particularly when, as now, many of those REITs can be snapped up at a tidy discount to net asset value.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Malcolm owns shares in British Land, Primary Health Properties, Warehouse REIT, Tritax Big Box, Regional REIT, Custodian REIT, and LXi REIT. The Motley Fool UK has recommended British Land Co, Landsec, Primary Health Properties, Tritax Big Box REIT, and Warehouse REIT. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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