A real estate investment trust, more commonly referred to as a REIT, enables investors to pool their resources, which investment managers then use to buy assets.
But what are the advantages and disadvantages of investing in REITs, and should you consider them? Let’s break it down.
What are REITs?
REITs are investment trusts that own or finance income-generating properties. They are traded on the London Stock Exchange, meaning that they are easy to invest in and highly liquid.
More specifically, REITS are property stocks that have registered for special status in order to acquire certain tax advantages (like not having to pay UK corporation tax).
Under the REIT regime in the UK, 75% of the company’s assets must be properties that are available to rent. And 75% of profits that these companies generate have must come from rental income.
REITs usually sign their tenants to long-term leases, meaning their income tends to be quite reliable. And, the vast majority of this income is shared out to investors in the form of dividend payments.
In fact, in exchange for receiving those tax advantages described above, REITS are obliged to distribute a minimum of90% of annual profits to shareholders by way of dividends. This makes them especially popular stocks with income investors.
REITs in the UK tend to focus on one specific type of property segment. However, some offer exposure to a multitude of real estate classes, providing added investor protection through diversification. Property segments include:
- Retail properties
- Office blocks
- Industrial spaces
- Residential real estate
- Healthcare properties
- Warehouses and distribution complexes
- Data centres
Top REITs to buy
Here are three REITS that can be bought on the London Stock Exchange today.
|Ediston Property Investment Company (LSE: EPIC)||Edinburgh||Generates the majority of profits from retail parks|
|The PRS REIT (LSE: PRSR)||Manchester||Invests in the residential rentals sector|
|Assura (LSE: AGR)||Warrington||Develops and acquires primary healthcare facilities|
Ediston Property Investment Company
Ediston Property Investment Company’s focus is firmly on the retail park sector. It has exited the office sector — and is in the process of withdrawing from leisure properties — with a view to moving towards full investment in just shopping parks.
Ediston has identified this property segment as the best for asset value and rental income growth. Retail parks are popular shopping destinations because they are usually easy to reach and offer an abundance of parking. There has also been an evolution of the types of stores these sites offer. It’s no longer just about supermarkets and DIY stores, which in turn offers a more diverse and appealing shopping experience.
The growth outlook for shopping parks has received a boost following the pandemic, too. Retail warehouses are larger and less cramped than traditional places like high streets. This gives them an advantage as shopper habits and preferences change.
Furthermore, these sorts of large retail units are also benefitting from the e-commerce revolution, and more specifically the growing adoption of ‘click and collect.’ This is thanks to their larger storage areas and ease-of-reach by car.
Ediston has more than a dozen retail warehouses spanning the whole of the UK. Its tenant base is diverse, and its major tenants include B&Q, B&M European Value Retail,and Boots.
The PRS REIT
The PRS REIT — whose name is partly an acronym of ‘private rented sector’ — aims to capitalise on soaring demand for privately rented family homes in the UK. As of mid-2022, the business had built 4,786 properties, up from 3,984 a year earlier.
The PRS REIT concentrates on building homes in major towns and cities where rental demand is particularly strong. It has a long-term target to build 5,700 homes, up around 20% from mid-2022 levels.
The REIT is popular with UK investors seeking to capitalise on rocketing residential rents. According to estate agent Hamptons, Brits will pay a total of £63bn in rent for the full year, a record high.
This fresh surge comes despite the economic slowdown in Britain. And it illustrates the defensive characteristics of The PRS REIT. The amount people as a whole spend on accommodation isn’t very sensitive to broader economic conditions. It’s why the company collected an impressive 99%+ of rents between January and June, and occupancy levels stood at a healthy 98%.
There aren’t nearly enough rental properties to go around in the UK, which is why rents are exploding. This reflects an exodus of buy-to-let investors in recent years and weak housebuilding activity. According to trade body Propertymark, the number of available private rented sector homes tanked 49% in the three years to March 2022.
Assura develops, acquires, and operates primary healthcare facilities in the UK. As of the middle of 2022, it had 662 properties like GP surgeries, dentist clinics, and diagnostic and treatment hubs. In total, around 6.8m Brits use Assura’s facilities.
Chronic underinvestment in recent decades has created a swathe of ancient facilities that are no longer fit for purpose. Assura aims to solve the problem by building healthcare properties suitable for a modern NHS.
Demand for new primary healthcare centres is set to grow in line with an increasingly elderly population. The Office for National Statistics, for example, thinks that the number of citizens aged 75 years and above will soar by 4.1m between 2019 and 2039, to 9.9m. With this demographic change, demand for medical services will inevitably increase.
Because Assura operates in a non-cyclical sector, rental income here is stable regardless of broader economic conditions. What’s more, the rent it receives from GPs is backed by the NHS. When combined, these factors give the REIT excellent profits visibility.
Are REITs right for you?
REITS in the UK can offer investors the opportunity to receive large and regular dividend payments. They can offer long-term capital appreciation too as the value of their properties increases over time.
That said, the steady rate at which asset valuations usually rise over a long time horizon means that REITS don’t tend to generate robust earnings growth like many other UK shares can.
REIT investing is a way that investors can invest in property without having to endure the hassle of buying or managing the assets. They also allow an individual the chance to avoid large transaction costs like stamp duty or real estate broker/estate agency fees. So for investors who are just starting out, REITs can be an effective way to get exposure to the property market.