One of the best ways to diversify your portfolio with a bit of bricks and mortar is by using real estate investment trusts (REITs) to gain exposure to properties in the UK and abroad.
Most of us don’t have the funds to buy an office block or a shopping centre. Well, this is where REITs shine. They allow investors to dip into these sorts of commercial areas without needing deep pockets or high-profile real estate connections.
But, navigating all the options can make it tough to narrow down the choices to find REITs that best match your goals.
To help inform your research into these unique investments, we’re going to be taking a dive into some of the most popular REITs available to UK investors.
Real estate investment trusts, or REITs, are companies that invest in different types of, you guessed it, real estate.
Purchasing shares in a REIT means you get to own a piece of the property portfolio owned by the company. This can provide a much more liquid way to own real estate than if you were to own physical properties.
If you’re wondering how to buy stocks, you can buy shares in REITs just as you would with other companies. REIT stocks are listed on some of the biggest exchanges across the world, giving you access to a huge variety at your fingertips.
REITs listed in the UK have a specific tax structure. So, it’s important to check the different rules and regulations if you’re considering investing in a REIT listed on an international stock market.
The UK REIT structure means that 90% of tax-exempt income must be distributed to the shareholders. Also, at least 75% of the gross assets held by a REIT and 75% of its profits must come from property rentals.
If you’d like a more in-depth refresher on this type of investment, check out our guide explaining in further detail what a REIT is.
This is the type of REIT you’ll mostly come across.
Being publicly traded on exchanges means that you can access them through your investment platform and even hold some of them in your stocks and shares ISA account for the tax benefits.
Trading as a public company means that these REITs offer a level of transparency to prospective investors. So, you can take out your best pair of reading glasses and look under the bonnet of public REITs, giving you an in-depth look at what’s going on.
Public listings also help provide the necessary liquidity to allow you to buy and sell them without much friction.
That element can actually be a big advantage when you’re dealing with property funds. Their open-ended cousins (OEICs) have run into problems in the past few years when unexpected investor withdrawals have triggered the need to go out and sell some of the funds’ assets.
That situation can lead the fund manager to suspend the fund while they sell down assets to meet outflows.
There are private REITs available too but these are much more difficult to value because of the lack of regular information they have to provide as a private outfit.
Investing privately into REITs is not a common approach. Private REITs can carry additional risks and tend to disclose fewer details on their performance and holdings.
You can invest in REITs in the same way as other stocks and shares.
Freetrade offers REITs in ISAs too. The 2023/24 tax year’s annual ISA allowance is £20,000. Any money made from a REIT ISA investment will have tax efficiencies, meaning you won’t pay UK capital gains or income tax on your investment gains. Tax treatment depends on personal circumstances, and these may be subject to change.
We’re going to be taking a look into some of the most-bought real estate investment trusts on Freetrade throughout 2021.
Popularity doesn’t make these REITs the best REITs, but it does give you some useful insights into the thinking patterns of other UK investors. That’s why it’s important to highlight that this is just a wrap-up, not a suggestion or recommendation that you buy or sell any of the securities mentioned.
Remember that everyone has their own goals and unique financial circumstances. These, along with your tolerance for investment risk and time horizon, should inform the mix of assets in your portfolio.
Our resource hub for investing in the stock market might be able to help make that blend a bit clearer for you and our guide on how to invest in stocks is a great start for first-time investors. And if you are still unsure of how to pick investments, speak to a qualified financial advisor.
To better categorise the different types of REITs, we’ve grouped them into separate sub-sectors. This way you can see some of the broad distinctions that differentiate them.
We have a solid property infrastructure here in the UK and this has helped create a blossoming market for UK REITs since we imported the idea from the US in 2007.
REITs have been operating across the pond since the 1960s, so it took a while for the idea to catch on here in the UK. But now, there are plenty of UK ETFs to choose from.
The investments below are based in the UK and concentrate on British property. They aren’t necessarily the best UK REITs, but this list might serve as a useful launchpad for doing your own research before you invest.
Along with investing in distribution centres, this UK REIT manages a number of existing properties with big-name tenants like B&Q, Ocado, and Royal Mail. The company also hosts Amazon as one of its largest tenants. It was these sorts of high-value logistic relationships that propelled it to become the most popular UK REIT on Freetrade last year.
Long-term growth appears achievable due to the high demand for large distribution centres near major roads and the general scarcity of similar opportunities in the UK for big retailers and ecommerce stores. However, nothing with property investing is ever a certainty.
Researching and finding the best UK REITs can be a tough task. This ETF reduces that burden by spreading your investment across roughly 40 REITs, property companies, and liquid fixed-income securities, all within the UK.
Although it just concentrates on the UK market, investors do get exposure to a diverse range of property sectors.
Using ETFs as a way to buy and invest in REITs is becoming increasingly popular. Largely because it’s an affordable and diverse way to get wide exposure to certain property sectors or markets.
This can be an affordable way to get broad access to a bunch of investments without having to try and find the best individual REIT stocks yourself.
Of all the most popular REIT ETFs on Freetrade last year, IWDP ranked first. As the name suggests, its aim is to track the performance of real estate companies in developed countries.
The holdings are made up of just over 300 investments, including some of the most prominent REITs from across the developed world. Specifically, companies that have a forecast dividend yield of at least 2%.
With this popular ETF, investors get exposure to property across developed Asia. This includes Asia-listed real estate companies and REITs from countries such as Singapore, Japan, and Australia.
The ETF tracks an index of just over 100 companies whilst also concentrating on firms with a forecast dividend of 2% or higher.
REITs in this category look for the best ways to generate income through mortgages.
An economic climate with rising interest rates can be tough for mortgage REITs. This is partly because these companies tend to borrow money to fund growth. If those borrowing rates aren’t locked in, they can face higher charges.
But, the lengthy nature of mortgages can provide some interesting long-term investment opportunities.
For this REIT, the emphasis is on lending services for commercial, multifamily, and single-family rental (SFR) markets. Providing commercial mortgages and multifamily loans has allowed this mortgage REIT to build upon its growth by consistently expanding its portfolio.
The result has led to increasing dividend payments in a sector where other mortgage and property REITs have struggled to bump up payouts to investors on a regular basis. Although rising interest rates are an obstacle, housing shortages are helping to bolster occupancy levels and rental rates in apartments and multifamily units.
Most REITs offer a dividend, that’s kind of their whole jam.
When searching for different opportunities to look for dividend income from property, it can be worth thinking outside of the box and checking out some of the more unusual investments.
Making money from casinos isn’t just for high rollers. VICI is quite a unique REIT, generating dividends through rental income in its hospitality-heavy property portfolio.
It owns some of the biggest gaming destinations on the planet, including the likes of Caesars Palace and the MGM Grand in Las Vegas. This vice hold on major gambling, hospitality, and entertainment venues meant the REIT was hard-hit during the pandemic.
However, it’s since recovered and remained a relatively stable dividend option amid volatility across other sectors.
This REIT has a heavy hand in communication infrastructure, including wireless and broadcast facilities across the world.
Although this came in at number eight in terms of popularity on Freetrade, it’s number one when looking at REITs by market cap.
The current market cap is around $118bn. Its sheer size and strong business model has allowed the price to remain relatively stable over the past year. The dividend yield isn’t eye-watering, but it’s a manageable level for a large blue-chip REIT stock.
With one of the largest REIT market caps around, this company was investing in data centres before it was cool.
It’s been around since 2004 and clients include a who’s who of major tech players. From the likes of Amazon Web Services to Google Cloud and Adobe.
The global infrastructure of this specialised REIT affords it plenty of growth opportunities to build and expand the dividend income it offers, but performance will be closely linked to tech earnings.
Anything that involves a physical product will likely come into contact with a warehouse at some stage in the supply chain, even if it’s just a one night stand before moving on.
So, it's big business. And companies pay a lot for the privilege of sheltering goods in warehouses in the UK and abroad, leading to plenty of REIT opportunities.
They really came into their own early on in the pandemic, when online shopping boomed. For REITs, the whole dynamic shifted focus away from owning prime real estate on high streets to building warehouses out of town.
Whether that’s something that’s here to stay or there will be a gradual return of those flagship stores in portfolios is something investors will have to keep a close eye on.
This was the second most-bought investment trust on the Freetrade platform in 2021, in large part due to their biggest client. A little company you may have heard of called Amazon.
Dubbed ‘Amazon’s landlord’ this REIT provides warehousing facilities to a number of e-commerce firms. This makes the performance somewhat tied to tech stocks and online shops. Because, if they’re doing well, this can lead to an uptick in the demand for Prologis warehousing.
The company has roughly 5,800 customers spread across 19 countries. This doesn’t make them immune to rough times, but there is some international diversification across their 4,675 properties. It’s also one of the biggest REITs available in terms of market cap, sitting at just over $88bn.
Another REIT from the US, this company owns a decent portfolio of 551 industrial properties spread across 40 states. The bulk of the buildings is made up of approximately 459 warehouses and distribution centres.
This multi-billion dollar REIT packs a punch with a 96.9% occupancy rate, and decent year-on-year net income growth, and it rewards investors with a monthly rather than quarterly dividend.
Healthcare is big business. Especially in countries that have privatised systems.
This creates plenty of need for all sorts of properties linked to various medical fields and disciplines.
As populations age and advancements make it easier to treat conditions, this leads to a growing demand for facilities in major areas like long-term care.
This REIT concentrates on healthcare facilities and was the third most popular REIT on the platform in 2021.
The focus on assisted living facilities (ALFs), and skilled nursing facilities (SNFs), in the US and UK has allowed the company to pursue a strong commitment to dividends. This approach involves using long-term leases to provide a level of stability.
Being a healthcare REIT focusing on nursing and care homes, it has had plenty of struggles to deal with since the beginning of the coronavirus pandemic. A falling stock price is partly why the dividend yield has been so high at times.
But, there’s still plenty of breathing room for the dividend to be cut. And, with an ageing population, Omega is banking on occupancy levels in nursing homes remaining strong.
Although there was an unexpected shift away from office work over the past few years, these spaces still present some strong investment opportunities.
REITs that invest in office buildings have been extremely popular in the past, partly because it's a simple investment thesis to grasp.
We all know what an office is and most of us have worked in them at some stage.
Regardless of remote working trends, there are still plenty of companies who need physical office space and are willing to pay for the privilege.
This was the most popular real estate investment trust on the Freetrade platform in 2021.
The US REIT is listed in America and its focus is to buy suburban corporate headquarters and office properties. As a property REIT, its buildings and office space are leased out to single tenants with solid credit scores.
Orion is actually a spin-off from another huge REIT, Realty Income. Now going it alone, the average lease term is just over four years. A relatively low figure in comparison to some competitors.
The planning and costs involved in lease turnovers mean the REIT pays a comparatively modest dividend. But a strong occupancy rate of 88.3% and a solid backstory signals maturity for the REIT as it finds its feet.
Although this REIT does have a significant foothold in office buildings, its reach also stretches into warehouses, retail property, and self-storage facilities. So, there’s some diversification across the investment opportunities it looks for.
Sneaking into the top 10 at number nine in terms of popularity for REITs on Freetrade, the huge range of approximately 1,266 properties provides the REIT a certain level of stability although it is still exposed to the risk that the whole property sector falls out of favour. It leans on its diverse property portfolio in an attempt to maintain its strong commitment to dividends.
The returns on offer from this unique category of investment can swing wildly depending on the country, property sector, and what’s happening in the wider world.
However, there are large indices that track the performance of publicly traded equity REITs. So far, the data is looking strong over recent decades, supporting the notion that the average return from REITs can compete with most other major indices.
But, these strong returns aren’t guaranteed to continue and can’t be extrapolated across every single REIT on the market.
Before investing in a REIT, it’s worth checking out the track record. Take a look to see how long it's been around, what the price volatility has been like, and how stable the dividend income has been. Past performance doesn’t predict future results, but a snapshot into the REITs history is always useful.
Just like with any investment, various REIT stocks will have different goals. Some will be looking to grow, whereas others will be laser-focused on maintaining the current level of business at profitable margins.
As we’ve mentioned, highly popular REITs do not always equate to the best REITs. But you might find it’s still useful to look at the most traded shares on Freetrade and factor the results into your research.
Here are all the popular REITs from the Freetrade platform that we’ve discussed, excluding the ETFs.
Most popular REITs on Freetrade in 2021, as measured by total buy value.
With high inflation and rising interest rates, the dividend income offered by REITs looks like an attractive option to consider.
If you are searching for the best dividend stocks for 2022, REITs could very well be worth digging into further due to the immediate economic conditions we’re facing right now.
REITs can offer a unique way to own property and generate an income, without much heavy lifting. Yet, a REIT comes with its own considerations that you need to think about.
Using REITs to invest in property is definitely worth considering as a part of your strategy. And, there's an increasing selection of new stocks on Freetrade for you to choose from.
But, REITs are not necessarily the best investment to go for unless you’re using them as part of a healthy and balanced stock portfolio.
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