Rising property prices mean lots of homeowners have made a handsome profit from their houses. That probably explains why 2.5 million of us have decided to invest in buy-to-let.
But buy-to-let is far from being the only way to invest in property. Property companies like Real Estate Investment Trusts (REITs) are stock market listed companies that own and manage property portfolios on behalf of their investors.
They can invest in lots of property types, from flats to warehouses. They also have four distinct advantages over direct property investments, tax efficiency, diversity, convenience, and you can sell it when you want to. Remember all investments can fall as well as rise in value, so you could get back less than you invest. Yields are variable and aren’t a reliable indicator of what you’ll get in the future.
The cost of investing in property directly has increased significantly in recent years, largely because of higher taxes.
A 3% stamp duty surcharge introduced in 2016 means the total stamp duty payable on a £250,000 buy-to-let property now stands at £10,000. On top of that, since 2017 landlords have no longer been able to claim full tax relief on their mortgage interest payments, and that is being gradually extended out to 2020.
There’s also the usual capital gains and income taxes to consider.
By comparison, stock market property investments offer the potential for some quite substantial tax benefits – although tax rules do change, and benefits depend on your individual circumstances.
Firstly you’ll usually only pay 0.5% stamp duty on stock market purchases. Even better, if you buy shares within an ISA or SIPP you don’t have to pay any income or capital gains tax at all. You can effectively hold property investments in a tax-efficient wrapper.
Diverse and convenient
Even a big buy-to-let portfolio is usually only made up of a relatively small number of properties. That means you’re very exposed to risks like empty properties or hefty maintenance costs.
Because listed property companies pool money from lots of investors, they invest in a lot more properties, and that helps to diversify these kinds of risks.
You also don’t have to deal with any of these issues yourself. The fund has a professional management team that run the properties and also take advantage of opportunities to buy and sell properties when they’re favourably priced.
You can even spread your money around lots of different types of property. British Land, for example, is one of the UK’s largest REITs and has investments in shopping centres as well as central London offices.
Sell it when you want to
Unlike a physical house – which as we all know can take months to sell – shares can be sold at any time. Unlike a property you don’t need to sell your whole investment at once, if you want to realise some of your investment you just sell a portion of your shares.
Grainger – the UK's largest listed landlord
Grainger constructs and rents flats for the private rental sector, and is the UK’s largest listed landlord. The group owns 6,500 rented homes, and has £1.37bn of projects either under development or in the pipeline.
Last year it collected £43.8m in rent and paid out £20.8m in dividends while also increasing its net asset value per share by 4%.
The group has just agreed to buy out its joint venture partner in GRIP REIT, for £347m. That adds another 1,700 rental properties to the portfolio, and since it’s being funded by a rights issue, should help reduce debt.
Analysts are forecasting a prospective dividend yield for the next financial year of 2.4%.
Grainger properties by Geography
Source: Grainger annual report, 2018.
Tritax Big Box REIT – Betting on the Big Box
Tritax buys and rents out ‘big boxes’. They may not be pretty, but these giant, 500,000 square foot warehouses are at the heart of modern logistics and e-commerce. They house the automated handling equipment that keeps stock flowing as efficiently as possible.
Recent results showed valuations continuing to creep upwards and a shortage of supply is driving up rents.
Investors should bear in mind that, as a REIT, Tritax must pay out the majority of profits as dividends. That limits its ability to buy new properties, so the company frequently turns to shareholders for extra cash. That will remain a major feature in the future, but also means the company offers a prospective yield of 5.1%.
Tritax Big Box REIT dividend per share (GBp)
Source: Thomson Reuters Eikon, 14/11/18 *estimate
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
Yields correct as at 20 November 2018.
The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments. This website is not personal advice based on your circumstances. So you can make informed decisions for yourself we aim to provide you with the best information, best service and best prices. If you are unsure about the suitability of an investment please contact us for advice.