Real Estate Investment Trusts (REITs) allow you to gain exposure to the real estate market via a fund manager. The REIT might invest in commercial properties, multi-family homes, offices, retail space, or health care facilities.
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In most cases, the fund will either purchase the underlying real estate outright, or invest in debt via mortgage-backed securities. Either way, the overarching benefit of investing in a REIT is that you will be entitled to income that the real estate derives, as well as capital gains through appreciation.
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In this article, we explain the ins and outs of how REITs work, how you make money, and what you need to do to get started with an investment today. We also explore some of the top UK REITs currently in the market.
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What is a Real Estate Investment Trust (REIT)?
As the name suggests, a REIT allows you to gain exposure to the real estate arena. However, instead of buying properties yourself, you will be investing money with a fund provider. The fund in question will pool your money together with thousands of other investors, and then add various property-types to its portfolio. In most cases, REITs will specialize in a certain segment of the real estate space.
For example, the provider might focus exclusively on multi-family residential homes, or large-scale shopping malls. REITs will invest in both equity and debt. Regarding the former, this is where the fund will purchase the home, office block, or shopping mall outright. And the latter – the REIT might purchase mortgage-backed securities, meaning that the investment is based on debt.
In terms of the investment process, REITs are usually listed on a stock exchange like the LSE or NYSE. Not only does this allow you to make an investment with ease, but it also means the investment is liquid. In Layman’s terms, this means that you can exit your investment at any time – which is something you wouldn’t be able to do as a conventional homeowner.
What are the Pros and Cons of REITs?
How Does a REIT Work?
REITs are ideal for the newbie investor, as you won’t be required to do any of the hard work associated with sourcing properties, finding and managing tenants, collecting payments, or analysing real estate market trends.
On the contrary, you simply need to choose a REIT that you like the look of, purchase the respective stocks, and then enjoy passive income. You should receive your share of rental payments on a monthly basis via dividends, and capital gains via an increase in the REIT’s stock price.
Types of REITs
First and foremost, you need to assess the type of REIT that you are investing in. While some providers will diversify into a range of different property sectors, some will specialize in just one.
This might include:
✔️ Residential Real Estate
When we refer to residential real estate in the context of REITs, this normally centres on multi-family properties. This might be a gated complex that consists of 100 individual houses – all of which are rented to general tenants. Alternatively, this could also be a high-rise apartment complex with hundreds of condos.
Either way, these are properties that would otherwise not be available to you an everyday investor, not least because the value of the real estate is likely to be in the tens of millions of pounds. REITs can access this highly lucrative rental market because of its multi-billion pound war chest. Don’t forget, the provider will have thousands of individual investors under its belt – some of which will consist of institutional money.
✔️ Retail Real Estate
As the name suggests, retail real estate relates to commercial buildings that are rented to retail companies. Think along the lines of a huge shopping mall that consists of hundreds of shops, cafes, restaurants, and bars. Each of these individual companies will need to pay rent to operate in the shopping mall – which goes directly to the REIT in question.
One of the main benefits of choosing a REIT that specializes in retail space is that rental agreements are typically signed on a long-term basis. As a result, the provider will benefit from a fixed tenant for a number of years. Unless the underlying business is struggling, rarely will they look to move elsewhere when the lease is due for renewal.
On the flip side, if stores within the shopping mall begin to experience a downfall in sales, this might result in an inability to meet rental payments. If this is the case, it could have a direct impact on the REIT, not least because it will need to find new tenants.
✔️ Commercial Real Estate
Some REITs will specialize in commercial real estate. This typically centres on buildings that are hired by businesses. For example, the REIT might purchase an industrial unit and then lease each warehouse out to a large-scale manufacturer. Alternatively, the provider might invest in a high-rise office block.
Either way – and much like the retail real estate space, tenants will often sign long-term leases that will last for a number of years. This means that the REIT has a guaranteed source of income until the lease is due for renewal. Once again, the REIT provider always faces the risk of non-payment if a tenant runs into financial difficulties.
✔️ Health Care Real Estate
REITs that focus on health care facilities might hold a portfolio of hospitals, care homes, and medical research facilities. This is especially the case in the private health care sector, where tenants come from outside of the national health service.
Much like any other REIT, the tenant will pay rent to the provider. However, you will often find that leases are in place for a number of decades – especially if it’s tied to a large hospital facility.
Making Money via a REIT
So now that you know the types of real estate that REIT providers typically invest in, we now need to look at how you are likely to make money. In this sense, you will make gains through two key income streams – rental payments and appreciation.
Rental Payments (Dividends)
One of the most attractive aspects of investing in a REIT is that you will benefit from a fixed stream of income. Regardless of whether the REIT is involved in commercial, residential, retail, or health care properties – each and every property is placed in the rental market.
In other words, tenants will pay monthly or quarterly rental payments to the REIT provider – and as an investor, you will receive your share. In terms of how much you are likely to make, this depends on a range of factors – such as the location and size of the property, and the length of the lease.
You also need to factor in the fees associated with finding and managing tenants, as well as collecting and distributing payments. Nevertheless, below we have listed a basic example of how your share of rental payments would work when investing in a REIT.
- The REIT has £1 billion worth of properties within its portfolio
- You invested a lump um of £5,000 into the REIT
- Across thousands of properties, the REIT receives an average annualized yield of 6% in rental payments – including fees
- This means that over the course of the year, you received £300 in dividends (£5,000 x 6%)
- Th dividend payments are usually paid every month
As you can see from the above, you were able to make a juicy return of 6% per year without needing to do any of the work. This makes REIT investments a passive stream of income.
Appreciation (Capital Gains)
As lucrative as fixed rental payment are, the good news is that you also stand to make money when the underlying properties increase in value. Known as ‘appreciation’, this allows you to increase the value of your investment over time. The specific amount of appreciation that the REIT benefits from will depend on the market that the properties are located in.
For example, if the REIT invests in residential properties, and the complex is based in an area with a strong local economy, then the real estate could appreciate by 5-10% per year. At the other end of the spectrum, if the REIT holds a large-scale shopping complex – but only 60% of stores are currently being rented, this could have a major impact of the value of the real estate.
Nevertheless, here’s an example of how you will benefit from appreciation when investing in a REIT.
- You invest in a REIT that specializes in commercial buildings
- Its portfolio of properties is worth £2 billion in January 2020.
- You decide to invest £10,000 via the REIT’s publicly-listed stock
- Making the assumption that no other properties have been purchased since you invested, in January 2021 its portfolio is now worth £2.1 billion
- This presents an increase of 5%, which is based on the underlying properties appreciating in value
- The increase will be reflected in the REIT’s stock price, so your £10,000 shares now have a market value of £10,500
- If you wanted to realize this profit, you would need to sell your shares
As we discuss in the next section, if the REIT has invested in mortgage-backed debt, it will not benefit from appreciation. Instead, it makes money from the interest on the debt.
REITs: Equity vs Debt
It is also important to understand the underlying make-up of your REIT investment in terms of equity and debt.
Equity
If the REIT purchases the property outright – then the investment is based on equity. This means that the provider owns the real estate 100% outright, with no loans or mortgage tied to the property. As a result, you will benefit from fixed rental payments as and when they are paid by the tenant.
Debt
Some REITs also invest in debt. In most cases, the provider will loan money to large-scale businesses that wish to purchase real estate themselves. This might be a company that wants to purchase a new manufacturing plant, or a private health care provider that wants to buy new hospital premises.
Either way, the REIT will not own the underlying property, as they are merely financing the mortgage agreement. As such, the REIT will earn money through the interest charged on the loan.
From the perspective of your investment, you will still earn monthly income when the loanee makes its payments. However, as the REIT does not own the property in question, you won’t benefit from appreciation.
Benefits of Investing in a REIT
If you’re still sitting on the fence as to whether or not a REIT is right for your long-term investment goals, below we have listed six reasons why you might want to consider taking the plunge.
✔️ No Need to Purchase a Property Outright
Firstly, attempting to get your foot on the property ladder is no easy feet in the UK – espcially if you’re based in London. Not only do you need to contend with ever-growing property prices, but you will need to contribute a deposit of 10%-20%. Furthermore, you will need to be in possession of a good credit profile, and you’ll be locking yourself into a long-term mortgage of up to 35 years.
This is in stark contrast to how REITs work. Crucially, as REIT providers facilitate investments via a stock exchange listing, you can effectively invest as much or as little as you wish. This is especially the case if using an online stockbroker like eToro – which allows you to invest in REITs from just $25 (about £20).
✔️ Diversification
If you do have the financial means to purchase a property outright, you are essentially placing all of your eggs into one basket. For example, let’s say that you buy a property in London worth £450,000. Although the London property market has historically been one of the best performing segments of the global real estate space, there is no guarantee that this will always be the case.
In fact – it is believed that Brexit will have a highly adverse impact on the London property market, with some analysists predicting a worse-case-scenaior downfall of 30%. This would be catastrophic for you as an investor, as you do not have the ability to offset the risk with other properties.
With that being said, REITs will typically invest in hundreds, if not thousands of individual properties. This will give you the best chance possible of diversifying your holdings in the event a particular property market becomes stagnant. You can amplify your divderisiction strategy further by investing in multiple REITs across the commercial, residential, health care, and retail sectors.
✔️ Gain Exposure to International Markets
If you’re based in the UK, then it’s likely you are looking to gain exposure to the domestic market. However, it is well worth considering expanding your horizons by holding properties abroad. Now, attempting to do this on a DIY basis would be a logistical nightmare. You would also need to have a firm grasp of local real estate laws and regulations.
Once again, this isn’t how the REIT space works. On the contrary, you can gain exposure to international real estate markets without needing to do any of the work. The REIT in question would have expertise of the local market, so you can target an overseas real estate investment with ease.
✔️ Two Streams of Income
As we briefly noted earlier, you will benefit from two streams of income when investing in a REIT. Take note, this is only the case if the REIT invests through equity, as opposed to debt. If it does, you will grow your money on a month-by-month basis through dividends.
This is linked to your share of rental payments that the REIT collects – less fees. As and when your dividends are paid, you can then reinvest them back into the REIT to benefit from compound interest.
On top of rental payments, you will also earn your share of any appreciation gains. This is typically paid one per year.
✔️ Passive Investment
One of the overarching benefits of using a REIT is that the entire investment process is passive. Other than actually buying and sell your shares, everything else is taken care of.
After all, who wants to go through the hassle of evaluating investment opportunities, finding, vetting and managing tenants, and then collecting and distributing rental payments? Instead, the aforementioned tasks will be completed by the REIT that you invest with.
It is also important to remember that the REIT is likely to have a team of highly skilled and experienced real estate specialists behind it. These specialists will look to source the very best deals in the market. Crucially, as REITs make money when the value of their stocks increase, they are financially motivated to maximize your earnings.
✔️ Highly Liquid
Finally – and perhaps most importantly, REITs are highly liquid. This is in stark contrast to a traditional property investment, which is anything but liquid. For example, let’s say that you own two properties in the UK.
If further down the line you decide that you want to sell your properties so that you can invest in a new venture, how long do you think this would take? Unless you are prepared to sell your properties below market value, the end-to-end process can take many months.
On the contrary, by investing with a REIT, you can exit your position as and when you see fit. You simply need to head over to the broker you purchased the shares from, sell them, and then withdraw the pounds back to your bank account!
How to Get Started With a REIT Today
Like the sound of what REITs offer for your long-term investment goals? If so, we are now going to show you how you can make an investment today. In fact, by following the step-by-step guidelines outlined below, you could get your hands on a REIT stock in less than 15 minutes!
Step 1: Choose a REIT to Invest in
First and foremost, you need to spend some time researching a REIT that meets your investment needs. For example, are you looking to gain exposure to the commercial property space, or are you more interested in multi-family residential units based in the US?
If you’re not too sure which REIT to invest in, we have listed our top three picks of 2024 towards the end of this page.
Step 2: Find a Broker That Lists Your Chosen REIT
Once you have found a REIT that you like the look of, you will then need to find an online broker that lists it. Take note, you should never open an account with an online broker just because it supports your chosen REIT.
On the contrary, this should include a range of other variables – such as regulation, fees, payment methods, and customer support.
Step 3: Open an Account and Verify Your Identity
Once you have found a suitable online broker that hosts your chosen REIT, you will then be required to open an account. The process rarely takes more than a few minutes, and simply needs some personal information form you.
This includes:
- First and Last Name
- Date of Birth
- Home Address
- National Insurance Number (or overseas tax number)
- Contact Details
In order to comply with regulators such as the FCA, the online broker will be required to verify your identity. In most cases, online brokers allow you to do this by uploading a copy of your passport or driver’s license. New-age platforms like Capital.com can validate the document automatically.
Step 4: Deposit Funds
Once you have verified your broker account, you will then need to deposit funds. Most brokers implement a minimum deposit amount, so be sure to assess what this is.
In terms of supported payment methods, this will vary from broker-to-broker. Nevertheless, in most cases, you’ll get to choose from the following:
- Debit Card
- Credit Card
- Paypal
- Skrill
- Neteller
- Bank Transfer
Unless you are depositing with a bank account, the funds should be credited instantly.
Step 5: Allocate Funds to Your Chosen REIT
At this stage of the step-by-step guide, you should now have a verified broker account that has been funded. As such, you can now allocate your account balance to your chosen REIT.
Regardless of which broker you are using, you will need to set up an ‘order’. This tells the broker exactly what investment you wish to make.
For example, you’ll need to enter the total amount that you wish to invest in pounds and pence. You also have the option of applying leverage to your trade. For example, if you apply leverage of 3x on your chosen REIT and you have £500 in your account, you can actually trade with £1,500.
Step 6: Making Gains via Rental Dividends and Appreciation
Once you have invested in a REIT, you will then be entitled to your share of dividend payments. This is in relation to the rental income that the REIT provider collects from its tenants. In most cases, the provider will distribute this to the broker on a month-by-month basis. When they do, the funds will show up in your broker account as cash.
As a side tip, it’s well worth reinvesting your dividend payments back into the REIT (or any asset class for that matter). In doing so, you will benefit from the fruits of compound interest.
When it comes to realizing your appreciation gains, this won’t be paid to you in cash. On the contrary, the gains will be reflected in the REIT’s stock price. As such, the only way that you can get your hands on the appreciation gains is to sell your investment.
Top UK Real Estate Investment Trusts (REITs) – Our 2 Picks
With hundreds of REITs floating on major stock markets like the LSE and NYSE, knowing which provider to go with can be challenging. With that in mind, below you will find our top 2 picks of 2023.
These pre-vetted brokers will either give you access to the UK property space, or markets located overseas. As such, it’s also worth considering a super-broad diversification strategy by investing in multiple REITs!
1. SPDR Dow Jones REIT ETF with eToro
If you're looking for a REIT that holds a highly diversified portfolio of real estate, we would suggest considering the merits of the SPDR Down Jones REIT ETF (RWR). In a nutshell, the provider invests in virtually every property-type imaginable. This includes everything from multi-family residential homes, commercial buildings, retail spaces, and even health care facilities.
Crucially, this ensures that you have exposure to the wider property industry, as opposed to simply niching down to a specific sector. Take note, the RWR REIT invests in the US real estate space, so you won't have access to UK properties. At the time of writing, the REIT provider has $1.7 billion worth of assets under management, with an expense ratio of just 0.25%.
This means that you will only be required to pay 25p on every £100 that you invest, which is tremendous value. In terms of making an investment, the easiest way to do this is with regulated online broker eToro. The platform does not charge any trading commissions on REIT ETFs, so it's only the spread that you need to look out for.
Moreover, eToro allows you to deposit funds with a debit/credit card, e-wallet, or bank account. Account minimums start at $250 (about £200). With that said, the platform allows you to invest just $25 per REIT, so you can diversify further by adding multiple providers to your list. Finally, eToro is a heavily regulated broker. It currently holds licenses from three tier-one bodies - including that of the UK's FCA.
- Supports all debit/credit card types
- No trading fees other than the spread
- Fast registration and KYC process
- Accounts are denominated in USD only
2. SEGRO UK REIT with IG
If you've got your heart set on a REIT that has exposure to the UK property sector, we would suggest considering the SEGRO UK REIT. The provider is a London-based real estate investment company that not only purchases UK buildings, but properties in continental Europe, too.
The vast bulk of its portfolio centres on large-scale industrial units, so you will benefit from both fixed rental payments and appreciation. Regarding the former, tenents are typically locked into lease agreements for a number of years, which affords you an element of long-term security.
Examples of real estate holdings that SEGRO currently has under its belt include major ports, rail freight terminals, and airport warehouses. If you like the sound of this particular UK REIT, you can easily make an investment with London-based broker IG. Launched in 1974, the broker has an excellent reputation in the online brokerage space.
It holds licenses in multiple countries - including that of the UK's FCA. Minimum deposits start at £250, and you can fund your account with a debit/credit card or bank account. Crucially, IG does not charge any commissions.
- Established in 1974
- Super-tight spreads
- Spot gold trading at just 0.3 pips
- Minimum deposit quite high at £250
Conclusion
If you’ve read our guide all of the way through, you should now have a firm understanding of what REITs are, how they work, and whether or not they are suitable for your long-term investment goals. Crucially, REITs are highly sought after by investors that are looking to gain exposure to the real estate markets in a diversified manner.
In most cases, you’ll be investing with a provider that has hundreds, if not thousands of properties and buildings under its belt. This means that you will benefit from income in two forms – rental dividends and appreciation. Perhaps, most importantly, REITs are ideal for those of you that seek a liquid investment, not least because you can exit your position at the click of a button.
We have also discussed our top 2 REITs of 2024. These providers have consistently performed well over the past decade, with returns outpacing that of traditional stocks and bonds.
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