Five-minute guide to Real Estate Investment Trusts
Real Estate Investment Trusts (REITs) were introduced in the UK in 2007. Since then, most of the UK’s largest property companies have converted to REIT status, including big names such as British Land and Land Securities. Here we take a look at what REIT status means and why REITs could be of particular interest to income investors. We then take a closer look at two individual REITs, one specialist and one generalist. What is a REIT? A REIT is essentially a company devoted to property investment. This means that, unlike many other property investments, it can be easily traded on the stock exchange – exactly the same as any other share. This can make it an attractive way for retail investors to access property investments at reasonable prices. In order to qualify for REIT status, at least 75% of a company’s profits must come from property rental, and 75% of the company’s assets must be involved in the property rental business. REITs must also distribute 90% of their property rental income to investors. In exchange for operating within these relatively strict parameters, and to encourage investment in UK real estate, REITs do not pay any corporation or capital gains tax on their property investments. What are the advantages for income investors? Having to pay out 90% of rental income as dividends can make REITs an attractive option for investors looking for income. The special tax arrangements also mean that the dividends are only assessed for tax once, rather than twice as would otherwise be the case. Many REITs have long-term lease agreements with their tenants, which helps to make rental income relatively reliable, though of course there are no guarantees. Those who are able to impose regular rent reviews on occupiers should also enjoy steady, if usually unexceptional, income growth. These traits led us to include Tritax Big Box, a logistics-focused REIT discussed in detail later in this article, in our five higher yielding shares for a low interest rate environment. Evaluating REITs REIT returns to investors are made up of two components - dividends and changes in Net Asset Value (NAV). NAV represents the value of all the assets owned by the REIT. For example, if the assets owned by the REIT, less any debt, are worth £1m and there are two million shares in issue, the NAV per share is 50p. If the value of the properties increases, either through market movements or development activity, the REIT’s NAV will grow. If a REIT, or the sector in which it invests, is particularly popular, demand might push the share price to a premium over the NAV. The same process in reverse might push the REIT to a discount. However, as a general rule, REIT share prices will tend to move in line with the NAV. Since REITs are required to pay out 90% of their income to investors, it is hard for them to build up enough capital to reinvest in new properties from their own earnings. For companies looking to expand, that [...]