How to invest in REITs?
|Investment | Property
Asked by spencer09, submitted
04 October 2011.
I wish to start investing into Commerical Proeprty REITS, however, I am not sure how best to go about this - i.e. to actually start trading.
I am looking to invest approx £200 per month on REITS, as I have knowledge in Commercial Property.
Are you able to reocommend how I go about this process - all these different / brokers (etc) confuse the hell out of me !!
Answered by Justin on 01 May 2012
As I'm sure you already know, REITs (Real Estate Investment Trusts) are simply a special type of investment company that invest in commercial property. The key benefit over traditional property companies is that provided they adhere to a set of rules (primarily that they distribute at least 90% of income to shareholders) then the company is exempt from corporation tax and capital gains tax on its property portfolio.
REIT investors receive 'Property Income Distributions' (PIDs) instead of dividends. They're paid net of basic rate tax, with higher and top rate taxpayers having to pay the balance at their marginal rate, e.g. if a higher rate taxpayer receives £80 they'll have to pay a further £20 of tax (gross PID was £100, £20 basic rate deducted then £80 paid out, further 20% of £100 owed). However, PIDs can be received gross, hence tax-free, by pension funds and ISAs.
As REITS are companies traded on the stock market you can buy and sell them via a stockbroker. As you want to save on a monthly basis I'd consider a broker who offers a low cost regular monthly dealing option, such as Interactive Investor or Halifax Sharedealing, who charge £1.50 and £2 per monthly trade respectively. Alternatively you could trade ad-hoc with low cost stock brokers like x-o.co.uk or jpjshare who charge under £6 per trade, although this would obviously add up on a £200 monthly investment.
I guess my main word of caution regarding REITs is that although they're fundamentally property investments, they're more correlated to stock market movements than bricks and mortar, i.e. the share price of the underlying property companies might be affected by general stock market movements independently from the value of the underlying property portfolio.
Many UK REITs are (at the time of writing) trading at a discount to their net asset value (NAV), i.e. the value of the company based on share price is lower than the value of the property it owns. The average discount to NAV is around 17% (you can view details on the REITA website). If the discounts narrow this will be good news for existing investors, but if there's a downturn in sentiment for the sector, or stock market generally bomb, they may widen further.
Rather than buy a specific REIT you also have the option to track an index of REITs, either in the UK or overseas. There are a number of Exchange Traded Funds (ETFs) that do so, for example take a look at iShares.
Finally, you can also invest in managed funds that in turn invest in a selection of REITs. This provides diversity and makes investing in overseas property straightforward (as does the ETF route), but you'll have the pay the fund manager around 1.5% or more in annual fees and they might have bad judgement.
I hope my answer points you in the right direction.