Over the past decade, the real estate investment trust (REIT) asset class has become a popular one. As a company that owns, operates or finances income-producing real estate, a REIT may offer exposure to retail, residential, office or industrial properties. REITs, which were introduced in the UK in 2007, must pay out 90% of their rental income to investors.
Buying shares in them could be a great way to invest in real estate. REITs are also highly liquid assets: investors can trade the shares on the stock market swiftly. Many investors would like to understand the difference between investing in property and REITs. Let’s take a closer look.
Becoming a landlord can be difficult
Since there will always be a need for real estate, investors looking for passive income have traditionally considered owning property as a top choice.
However, becoming a landlord can also turn into a full-time job when one has to mortgage, buy and manage several properties, collect rent, deal with estate agents as well as tenants, and maintain the property to an ever-higher standard.
Furthermore, since 2015, there have been several changes to how landlords are taxed in the UK, making it more complicated and expensive to become one.
If you’re finding the prospect of investing in UK property difficult, many analysts would remind you that as part of a diversified portfolio, there is genuine merit in having exposure to property.
So, could there be a better way for the average investor who may not have the time or the capital to build or maintain a real estate portfolio? Yes. Investors could easily buy top REITs to generate truly passive income.
One REIT I’m watching now
If you own a REIT, your fortunes will be tied to the ebb and flow of the property market, which is one of the sectors that has suffered since the 2016 Brexit vote. But most of us are quite ready to look past political uncertainties. Indeed, both real estate in various parts of the country and many REITs have recently started exhibiting strength.
FTSE 100 member Landsec (LSE: LAND) is a favourite among REITs. The group, which is behind London’s high-profile ‘Walkie Talkie’ building at 20 Fenchurch Street, holds a portfolio of prime London property. It also owns shopping centres including Westgate Oxford, a joint venture with the Crown Estate, and a stake in the Bluewater mall in Kent.
Its current dividend yield of 4.7% offers a comparable passive income to investing in properties in major cities nationwide. If you had invested £1,000 in LAND shares in early January 2010, over the past decade, your initial investment would have become about £1,450, excluding dividends.
In hindsight, compared to buy-to-let, a combination of growth and dividend income would have made this REIT a good portfolio choice. And investors would not have faced liquidity issues of having to own the bricks and mortar assets themselves.
The group’s price-to-book (P/B) ratio of 0.75 also appeals to value investors, with a number under 1.0 indicating a potentially undervalued stock.
In November, the group announced that Mark Allen, current chief executive at regeneration specialist St Modwen Securities will become its new chief executive “no later than June 1”. Mr Allen had also been chief executive of student accommodation company Unite Group. Investors are hopeful that Landsec will continue its growth trajectory under his leadership.
