Your five minute guide to REITs

What is a REIT?

A REIT is a property investment company. 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 ordinary investors to invest in property.

To qualify as a REIT a company must:

• Get at least 75% of profits from property rental
• Have 75% of its assets involved in the property rental business
• Pay out 90% of their rental income to investors

In exchange for operating within these fairly strict rules, and to encourage investment in UK real estate, REITs don’t pay corporation or capital gains tax on their property investments.

What REITs can mean for income investors

Having to pay out 90% of rental income as dividends can make REITs an attractive option for investors looking for an income.

The special tax arrangements also mean dividends are only assessed for tax once – when they reach investors. Although tax rules can change and benefits depend on your individual circumstances.

Many REITs have long-term lease agreements with their tenants, which helps make rental income and dividends relatively reliable, though of course there are no guarantees. Those who can carry out regular rent reviews on occupiers should also enjoy steady income growth.

What you should be aware of when investing in REITs?

Since REITs have to pay out most of their income to investors, it’s hard for them to build up enough capital to reinvest in new properties from their own profits.

For companies looking to expand, that leaves two main means of funding growth – selling new shares or taking on debt.

The level of debt in a REIT is something investors should keep a close eye on.

REIT debt is usually measured in relation to the NAV through what is called loan-to-value (LTV), the proportion of the property portfolio that is funded by borrowings. A higher ratio means more leverage.

Using debt prevents investors having to stump up more cash or risk being diluted, as they would be if the company chose to sell new shares. However it does bring extra risk.

Because property prices are cyclical, property values can change quickly. That means that a REIT with a high level of debt can quickly find itself in trouble as LTV shoots up – especially if a downturn also hits rental income, reducing its ability to service or repay debt.

Evaluating REITs

REIT returns to investors come in two parts – 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 one million shares in issue, the NAV per share is £1.

If the value of the properties increase, either through market movements or development activity, the REIT’s NAV will grow.

If a REIT, or the sector it invests in, is particularly popular, demand might push the share price up, so it’s above NAV. The same process in reverse might push the REIT to a discount. As a general rule though, REIT share prices will tend to move in line with the NAV.

• The UK's largest listed REITs

  Assura	AGR
  Big Yellow Group	BYG
  British Land Company	BLND
  Derwent London	DLN
  F&C Real Estate Investments	FCRE
  Great Portland Estates	GPOR
  Hammerson	HMSO
  Intu Properties	INTU
  Land Securities	LAND
  LondonMetric Property	LMP
  NewRiver Retail	NRR
  Primary Health Properties	PHP
  SEGRO	SGRO
  Safestore Holdings	SAFE
  Shaftesbury	SHB
  Tritax Big Box REIT	BBOX
  Unite Group	UTG
  Workspace Group	WKP

  List showing largest REITs by market cap within the FTSE 350 and in alphabetical order.

  Source: British Property Federation, correct as of November 2018.