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).
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:
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:
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.
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:
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.
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.