5th September 2019

Real Estate Investment Trusts: Investing in Commercial Property May Be Easier Than You Think

Investing in Commercial Property

While most people understand that diversification is an effective approach to long-term investments, many of us overlook the opportunity to include real estate in our portfolios. Even if you can’t afford to invest in commercial property development or land ownership directly, you can still benefit from buying shares in Real Estate Investment Trusts (REITs).

How to Get into Property with REITs

REITs make it easy to invest in property, and can provide a steady income stream to complement your stock, bond, and cash holdings.

Real Estate Investment Trusts are companies that:

  • generate most of their income from property they own and rent out,
  • disburse almost all of their earnings to shareholders, and
  • make their shares available through stock exchanges

REITs can be bought and sold through online trading sites, which gives you convenient access to a wide range of commercial property finance investment options, including:

  • professional and corporate offices,
  • warehouses and logistics hubs,
  • student accommodation and self-storage facilities, and
  • supermarkets and mixed-use developments

REITs are popular across the globe, but UK REITs are the 4th largest REIT market globally. Simple ‘supply and demand’ tells us why. Because the land supporting our commercial operations is finite, its value – along with the rents that comprise all REIT pay-outs – tends to increase over time.

REITs vs Property Funds

Land shortages aside, REIT investments work largely because property development and management companies pay no tax on the rent earned from REIT properties – so long as 90% of that income is distributed to shareholders as dividends.

Moreover, as a UK property investor:

  • you’ll pay no stamp duty on the purchase of REIT shares, and
  • holding your REIT in an ISA (Individual Savings Account) can help you avoid paying tax on income and capital gains

Although REIT dividend yields currently stretch as high as 8.4%, some investors remain cautious after the financial upsets of 2008 and 2016. And that’s understandable.

But there’s a key difference between REITs and property funds that every investor should understand. While individual property funds are frequently forced to suspend investor dealings and sell off irretrievable assets during a financial crisis, exchange-based trading in REIT shares continues.

In fact, some investors take advantage of economically uncertain times to scoop up REIT bargains and strengthen their property holdings.

What You Should Know Before Investing

Whether it involves a REIT, a land acquisition loan, or a property fund, every investment includes risk. But given the limited availability of land, commercial property is one asset that tends to bounce back from adversity.

Over the past decade, for example, total shareholder returns from UK-based REITs have averaged 141%! And that stands in sharp contrast to the 80% return generated by the average property fund.

Just the same, experts suggest being extra careful if you’re considering investing in REITs attached to high street restaurants, retailers, or Brexit-driven new-builds. You should also take care to always limit your property holdings to just 10% of your investment portfolio.

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