Are REITs a Reliable Alternative to Investing in UK Property?
The UK is obsessed with property with many programs on TV and magazines published on the topic whether it is purchasing, investing or renovating. But for most people this is just a dream as property prices in the UK are expensive and having the required capital is hard to obtain as well as the barrier to entry from banks using strict lending criteria.However, due to the Finance Act in 2006, legislation for REITs was introduced and came into effect in January 2007. A real estate investment trust (REIT) is a company that owns income-producing real estate and in most cases operates the real estate. REITs were designed to provide a real estate investment structure similar to mutual funds that provide investments for stocks. UK REITs are strong income vehicles as they have to pay out 90 per cent of their taxable income in the form of dividends to shareholders.There are, as of 2015, 27 REITs in the UK with a combined market value of £47 billion. There has been a flourish in growth of UK REITs since the changes were made to REIT legislation in 2012, particularly the abolishment of the two per cent seeding charge. REITs have now become a staple for income investors over the past decade now as the market has been established. There are few options that offer the same potential for high and rising cash pay-outs, a built-in inflation hedge and a diversified exposure to an asset that would be otherwise off limits – commercial real estate. The idea of REITs has now caught on not only in the UK but Europe and parts of Asia. REITs are now a globally accepted means to trade in property on the stock exchanges.An example of a wealthy business person who has built a fortune from a diversified property empire has close ties to the royal family in the UK. Gerald Grosvenor, the Duke of Westminster, is the wealthiest person in Britain due to interests in the Grosvenor Group. The corporation has offices in 18 cities worldwide and some happen to sit on the most valuable land in the West End of London. Although an investor cannot invest with the Duke unless they are a high-net worth individual, it does show the possibilities of building wealth through diversifying with publicly traded REITs.The UK REIT market is still lagging behind the US and as such a lot of REITs in the UK were previously property developers. REITs in the UK are still focused on property development rather than the landlord aspect unlike a large portion of the US market that is more focused on providing investors with an income through dividends.At the moment there is only the option to buy equity REITs, those that own and operate their own properties. In countries like the US there are mortgage REITs and hybrid REITs.An equity REIT buys and develops properties for ownership as part of its rental business. Properties can include residential flats or apartments, industrial buildings, shopping centres, offices and self-storage buildings. Equity REITs can also be geographically wrapped where it buys property for development in a certain area. Workspace Group is a prime example where the REIT buys offices and industrial buildings in the London area.An investor is presented with different, sometimes duelling investing strategies, when investing in an equity REIT. Some equity REITs will seek what is known as a ‘triple net’ or commercial lease that provide slow steady growth and high dividends. Other equity REITs buy new properties to develop providing low dividends but high growth.Currently there are no mortgage REITs in the UK, although there have been calls for them to be introduced by various property organisations. Back in 2012 there were calls for the chancellor, George Osborne, to introduce mortgage REITs in the UK as part of his budget. The British Property Federation stated that the UK had missed out on an opportunity of a new source of capital in an industry that is starved of debt.The market for REITs in the UK is still in its infancy but does provide potential at least for a growing sector for alternative investment in property for the average individual investor.