UK REITs. What are they? And how do they work?

In this article, we look into UK REITs, (Real Estate Investment Trusts) and explain how they work. We also discuss their tax advantages.

A Real Estate Investment Trust often abbreviated to REIT is a simple yet effective way to tap into returns from UK property. This includes residential property, commercial property and property development profits.

The top UK REITs invest their capital into a wide range of property assets and projects and pay an attractive income yield to investors. There are also some great tax breaks.

What is the advantage of investing in a REIT?

Ordinary company profits are initially subject to corporation tax (currently 19%) before they’re distributed as dividends and taxed as dividend income for the individual investor. This is a form of double taxation, and it makes earning rent via a trust or company very inefficient compared to directly investing in property as an individual. 

A REIT receives a corporate tax exemption for rental income, subject to the rules above. This allows net rental income to pass through to an investor without incurring the ‘double tax’. With the same underlying property investments, a REIT would provide a higher shareholder return than a standard investment trust. This is why UK REITs are such a popular vehicle for investing in property.

The London Stock Exchange (LSE) identifies the following benefits of REITs for UK investors:

• Tax transparent
•  Potentially high-yield returns
•  Access to property for minimal outlay
•  Low/controlled gearing
•  Portfolio diversification (low correlation to equities and bonds)
•  Liquid asset
•  Strong corporate governance.

The LSE states that REITs offer the following benefits for companies:

• Tax efficient structure
•  Access to new investors/capital
•  Performance more closely aligned to net asset value (NAV)
•  Acquisition currency.

What qualifies as a REIT?

To be able to use the REIT brand name, a property investment trust must:

• Be listed on a recognised stock exchange with at least 35% of the quoted shares held by the wider public, and not a closed group of 5 or fewer individuals.
• Distribute 90% of its tax-exempt property income profit each year as a dividend
• Be diversified across at least three properties with each representing less than 40% of the total trusts’ assets
• Invest 75% of gross assets into property rental assets (this can include buy-to-rent property projects)

When and Why were UK REITs created?

UK REITs were created in 2007 to help out the UK property sector. The bursting of the subprime lending bubble impacted banks’ solvency and the banks were unable to lend money. This impacted property companies that couldn’t get funds to complete developments. REITs solved this problem by incentivising investors to invest in real estate companies.

How many UK REITs are there?

Currently, there are over 50 UK REITs. The table below lists them according to size by market capitalisation.

UK REITs performance

The FTSE 350 Investment Fund Index shows a gain of 13.94% over the past 12 months. This is pretty impressive since 90% of returns are sent back to investors in the form of income.