When it comes to investing for passive income and tax efficiency, there are few options as good as REITs. Here we explore what REITs are, how they benefit investors, and are REITs a good investment in UK.
If you’re already sold on the idea, here’s our pick of the best REITs in UK.
What are REITs?
A real estate investment trust (REIT) owns, operates or manages income-producing real estate properties.
5 reasons why investors may prefer REITs over UK property
There are many reasons to consider UK property investment, but here are five key reasons why using a REIT can be advantageous:
1. Diversification
Real estate is a key part of any diversified portfolio, and REITs offer investors access to high-quality property investments across different sectors and locations. This gives investors access to a much larger real estate portfolio than they would be able to build on their own.
2. Liquidity
REITs are traded on public markets, which makes it easier for investors to buy and sell REIT units whenever the markets are opened. Most REITs have sufficient liquidity to process your buy and sell orders.
In contrast, buying and selling property can be much more complicated and time-consuming. You’ll may require a longer sales process to complete your property investment transactions.
3. Flexibility
REITs offer a high degree of flexibility, allowing investors to tailor their portfolios to their specific investment objectives. For example, investors can choose REITs that focus on a particular property type or sector, such as office buildings, retail centres, or industrial warehouses.
4. Tax efficiency
REITs are generally tax-efficient vehicles that allow investors to avoid being double taxed.
UK REITs are not taxed at the corporation level, the REIT dividends paid out to shareholders will only be taxed at the personal level. This is a benefit that most dividend paying stocks do not enjoy.
If you’re unsure, read our article about how your REIT dividends in UK are taxed.
5. Managed by a professional team
REITs are managed by a team of professionals, who are responsible for day-to-day decision making and actively managing the properties in the portfolio. Investors do not need to be well versed with the management of physical properties, nor have to deal with tenants directly.
At the same time, REITs are required to disclose their financial information on a regular basis. This gives investors greater insight into the underlying performance of their investments.
As an investor, you’ll only need to worry about picking the right management and REIT to invest in, instead of having to handle the nitty gritty of owning an entire portfolio of properties.
That said, REITs are not without risk, and investors should be aware of the potential risks before investing.
What are the risks of investing in REITs?
1. Economic conditions
The performance of REITs is closely linked to economic conditions. When the economy is strong, demand for real estate increases and property values tend to rise. However, during an economic downturn, demand for real estate falls and property values may decline.
2. Interest rates
Interest rates also have a significant impact on REIT performance. Rising interest rates make it more expensive for REITs to borrow money, which can eat into profits and cause share prices to fall.
3. Exchange rate risk
For UK investors, there is also the risk that the value of sterling could fall against other currencies. This would reduce the value of overseas investments, such as US-listed REITs, when converted back into pounds.
4. Property sector risk
Investors should also be aware of the risks associated with investing in a particular property sector. For example, the office sector is particularly sensitive to economic conditions, as businesses may downsize or relocate during an economic downturn. The retail sector has also been under pressure in recent years, as the rise of online shopping has led to many bricks-and-mortar stores closing down.
Conclusion
Before investing in REITs, you should carefully consider you investment objectives, risks, and potential rewards. REITs can be a great way to add diversification and potential high returns to your portfolio, but do keep in mind that they are not without risk.
Not all REITs are equal, if you’re looking for ‘safer’ options, why not start by exploring the blue chip UK REITs?