As you may have realised, holding your savings in cash is probably not going to be enough to retire on. With interest rates as low as they are, and with little chance that they will rise in the future, the interest you will earn in a Cash ISA will not compound in a meaningful way. Assuming a 2% interest rate (quite generous by today’s standards) £10,000 put in a savings account today will compound to just £22,080 over the course of 40 years.
By contrast, investing that same £10,000 in the stock market at a 5% annual return will compound to a much more attractive £70,400 over the same length of time! See the difference? I think that investing in REITs (real estate investment trust) gives you a great chance of hitting that figure.
Why invest in REITs at all?
The property sector has been one of the best-performing over the last decade. Unfortunately, getting a foothold on the property ladder is difficult enough for a buyer looking to purchase a house for personal use, let alone as an investment. This is where REITs come in. They offer a fantastic opportunity for investors to gain exposure to the UK property market without having to own actual property.
This has a number of advantages for the budding property investor. Firstly, it gives you the opportunity to get started in this sector with a relatively small amount of money. Secondly, it gives you the benefit of diversification. Most individual landlords own one, or at most, a handful of properties. REITs typically own a whole portfolio of properties, which may be geographically dispersed.
Moreover, by owning multiple REITs you can increase the diversity of your holdings, and minimise the chance that any one of them will underperform. For instance, you may want to get exposure to both Central London and the secondary cities in the North. You can also buy REITs that specialise in different types of property: from residential and retail, to healthcare and assisted living.
Shares of REIT British Land (LSE: BLND) are currently trading at 567p a share and have a healthy dividend yield of 5.5%, better than the FTSE 100 average of 4.4%. British Land, which is the UK’s second-largest listed property developer, has a net asset value of 905p, which means that the current share price is a substantial discount.
The reason for this discount has been the relative underperformance of the UK retail sector, which British Land has been focused on. However, in recognition of this trend, the company is now pivoting towards high-value commercial property, which I think is a positive sign. In particular, British Land’s offices in Central London have been performing well, and have counteracted some of the retail weakness that has weighed on shares in the past. Moreover, despite the challenges in retail, the management announced that the 2020 dividend would be increased by 3%, making this a good play for income-seeking investors.
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The Motley Fool UK has recommended British Land Co. 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.