The Real Estate Investment Trust (REIT) was introduced to the UK in 2007 and continues to grow in popularity as people look at new ways to make their money grow, with the financial picture over the coming years looking less than certain. Property is always a safe bet from an investment point of view, offering a level of guarantee that just isn’t possible in other stocks and markets.
What is a Real Estate Investment Trust (REIT)?
A Real Estate Investment Trust is an investment firm that focuses on just property. Both individuals and organisations can invest in a REIT, combining resources into a fund that purchases assets in the form of real estate. This can result in healthy profits when the value of a property increases, and via rental income. Offering both a short and long-term investment opportunity, however, any investor should be aware that there is always a risk involved. In this case, whenever there is a crash in the housing market.
Exempt from corporation tax on any profits that are made from rental income and any property sales, making them an excellent choice for anyone looking for a tax-friendly investment. It is an alternative to investing in stocks, and instead, a single investment can be made to own a share in a group of properties. The trust is managed by a large ETF (exchange-traded fund) provider that will make purchases on the investor’s behalf.
Profits can be made on increases in property value and rental income, while a passive investment. initial investments can be relatively small. It offers both a long and short-term investment opportunity. Property is a stable market but potential housing market crashes present a risk There are 50+ qualified Real Estate Investment Trusts on the London Stock Exchange, valued at around £54bn.
Originally a US concept, first introduced in 1960, only making their way to UK shores in 2007. They were intended to stimulate growth in the real estate market and were almost certainly a success. Many businesses and organisations that were involved in the property sector quickly became listed as REITs and the market remains strong to this day, both in the UK and the US.
To qualify as a Real Estate Investment Trust, a company needs to invest more than 75% of assets in different types of property, and earn more than 75% of gross income from rent, mortgage interest, and property sales. There are effectively two types of Real Estate Investment Trusts, Equity and Mortgage.
This type of fund owns physical properties and earns rental income. This income is paid out to its shareholders in dividends and is usually publicly traded. Able to invest in residential, commercial, and hospitality properties.
This type of investment buys mortgages and mortgage-backed securities and earns income from mortgage interest. These can be more volatile due to their reliance on the spread between short term and long term interest rates.
These two types can also be broken down into various sub-categories.
Residential: Homes, student accommodation, and apartment buildings
Office: Business parks, government offices, and skyscrapers
Healthcare: Hospitals, GP buildings, medical offices, and care homes
Industrial REIT: Distribution centres, warehouses, and E-Commerce offices
Retail: shops, shopping centres, and retail parks
Infrastructure: – Telecommunication, energy, and wireless infrastructure
Investing in a REIT
As previously mentioned, these investment vehicles make money in two ways. The first way is when the price of the trust’s shares increases and the second is through rental income, resulting in the payout of dividends to shareholders. They can be easily accessed through an Exchange Traded Fund which allows an individual or organisation to invest in multiple assets through a single investment. In terms of the investment, the ETF provider will combine funds from a large number of investors which can result in a fund worth millions, or even billions.
What is NAV?
NAV stands for Net Value Asset and relates to the value of everything that is contained within the fund, with the exception of debts and outstanding payments. E.G. The fund could be worth £50m in property value, but it could also owe £5m in outstanding payments, meaning the NAV is £45m.
It is possible to profit in two ways, investing directly or by trading on the price movements. You can invest via an ETF or by purchasing shares in REIT companies. For diversity, an ETF might be the best solution. For most people,this type of investment is a sensible option for topping up their pension portfolio due to the annual dividends that are paid out and the long-term security and growth of the property market.
The Benefits of investing
As 90% of REIT income is paid out as dividends to shareholders, investors do not have to pay income tax. They provide a passive income and performance which is broadly consistent and viewed as an excellent long term investment. These investment vehicles do not need to be limited to the UK market. passive income. It allows the investor to contribute ethically to healthcare and the national infrastructure. A first investment can be from £50 with certain ETF platforms.
The Risks of investing
You have no say in where the money is invested these investment vehicles are subject to economic changes and major events that cannot be predicted. The value of the fund is dictated by both regional and national housing markets.
If you choose to trade on the price movements of either type of investment vehicles or an ETF then you can, of course, profit by the shares going up or down. This would require a trading account that lets you speculate on whether the value will go up or down, such as some spread betting platforms. It should be noted that this type of trading presents a lot of risk and should only be considered after thorough research.
Real Estate Investment Funds – Conclusion
Considered to be a very stable investment opportunity and are perfect for investors looking for a long-term investment, especially those looking to add to their pension portfolio. You can invest via an ETF or by purchasing shares in a REIT company. There are two types of Real Estate Investment Trusts, equity and mortgage, and investors usually make money from the payout of dividends as a result of rental income or mortgage interest, depending on the type of fund.
Is this a good investment?
These trusts are not free of risk and are subject to economic disruption and housing market crashes. However the demand in UK property continues unabated, around 340,000 new homes need to be supplied in England each year, of which 145,000 should be affordable. The added incentive to property development is the relaxation in planning in respect of permitted development.