How to invest in REITs
Investing in the shares of real estate investment trusts (REITs) has become a popular way of gaining exposure to the housing market. Discover how you can invest in REITs or speculate on their price movements.
A real estate investment trust, or a REIT, is a company that buys income-producing real estate assets. They enable individual investors and other companies to pool their money together in order to buy properties and profit from any increases in value.
REITs have been modelled after mutual funds but instead of investing in stocks, the companies invest in properties.
REITs were established in the US in 1960 and they were eventually introduced in the UK in 2007, with the hope that they would fuel speculation and real estate sector growth. The decision was so popular that most major property-linked companies became listed as REITs.
According to the London Stock Exchange, to qualify as a UK REIT at least 75% of the company’s profit must come from property rental, and 75% of its assets must be involved in the property rental business.1
Types of REIT
REITs often specialise in a type of real estate asset or a specific sector, but broadly speaking they can be split into two categories: equity and mortgage.
Equity REITs are the funds that own physical properties. They generate their income from leasing out the space and collecting rent – the income is then paid out to shareholders in the form of dividends. Normally equity REITs are publicly traded, and can include companies involved in residential, commercial or hospitality real estate.
In the US, there is another type of REIT, called mortgage REITs, or mREITs. These are funds that invest in mortgages or mortgage-backed securities. They do not own the properties themselves, but rather the debt associated with them. They generate income from the interest rates associated with these investments.
Why invest in REITs?
The main reason that investing in REITs themselves is so popular is because they give investors access to assets that might otherwise have been unaffordable. As an individual, property might not be a practical investment, but with a collection of other investors and companies, it becomes more reasonable.
Another reason that REITs are popular is because many are publicly traded companies, meaning they are listed on national stock exchanges, where they can be bought and sold in the same way as conventional shares. Like all listed companies, the value of a REIT’s shares is decided by market participants throughout the day, which means that traders and investors can profit from the price movements
REITs are a common choice because they offer the potential for long-term returns, in a similar way to other publicly traded companies. This is because there is the potential to profit from price movements, as well as from the dividends that are paid to investors – legally, REITs must pay out at least 90% of their rental income to shareholders.
How to take a position on REITs
There are two ways to take a position on REITs: investing in REITs or trading on their price movements. Your decision about whether to trade or invest will depend on your personal preferences and strategy.
Before you choose which method to use, let’s look at the options available to you.
How to invest in REITs
If you want to invest in REITs, you can buy the shares of the companies themselves or invest via exchange traded funds (ETFs), which are designed to track a basket of REIT companies.
Normally, you would invest in a REIT if you have a longer-term view of the market. They are common investment vehicles for financial funds and retirement portfolios because they deliver dividends annually.
You can invest in the shares of REITs and a range of ETFs through our share dealing service. Investing in the shares of REITs means that you put up the full value of your position upfront, and profit if the REIT increases in value. You would receive shareholder rights and dividends if they are paid.
Discover three UK REIT stocks to watch.
If you want to build a more diverse portfolio, you could invest in a REIT ETF, which is made up of different REIT stocks. ETFs can be bought and sold in the same way as shares. Some popular REIT ETFs include the Vanguard REIT ETF, the Schwab US REIT ETF and the iShares Global REIT ETF.
How to trade REITs
Alternatively, you could choose to speculate on the shares of REITs or ETFs by using derivative products, such as spread bets or CFDs. When you trade REITs, you don’t need to take ownership of the shares. This means that you can profit from REIT stocks that are falling in value, as well as those that are rising.
With spread betting, you are placing a bet on the direction that you think the price of a REIT stock or ETF is headed. The profit or loss you would make depends on how far the market goes in the direction you have predicted. Spread bets are free from stamp duty and capital gains tax (CGT).2
You can trade a range of REITs and REIT ETFs when you spread bet, including:
- VanEck Vectors Mortgage REIT Income ETF
- iShares Residential Real Estate Capped ETF
- City Office REIT Inc
- American Tower Corp (AMT)
If you decide to trade CFDs instead, you would be entering into an agreement to exchange the difference in a REIT stock or ETF’s price from when the position is opened to when it is closed. CFDs are particularly useful for hedging your portfolio, because although you pay CGT, you can offset any losses against future profits.1
When you trade CFDs, the REITs and REIT ETFs you can trade include:
Best UK REIT stocks to watch
As there are so many different REITs around the world that you could invest in or trade, we’ve taken a look at three UK REIT stocks to watch. These REIT stocks are not necessarily the largest companies by market capitalisation, but they have gathered significant market interest for their share price movements – both positive and negative.
Land Securities Group plc (LAND)
Land Securities Group plc (LAND) is the largest commercial property development and investment company in the UK. The firm dates back to 1944 and is listed on the LSE a decade later. It is also a constituent of the FTSE 100. Land Securities became a REIT after the status was first introduced to the UK in 2007.
Shortly after, LAND stock fell significantly during the 2008 financial crisis – from a pre-crash high of £21.06 in 2006 to an all-time low £3.21 in 2009. But after rebranding as LandSec in 2017, it began to regain some of its value. By 2018, shares of LAND were trading at a yearly average of roughly £9.00 per share and the company even paid shareholders 44.2p per share in dividends.3
British Land Company plc (BLND)
The British Land Company plc (BLND) is another one of the UK’s largest property development and investment companies. The firm was founded in 1856 as a branch of the company later known as Abbey National. It listed on the LSE in 1956 and is also a constituent of the FTSE 100.
British Land became a REIT in 2007, which saw the company’s shares reach an all-time high of £14.21. But, like LandSec, it was quickly impacted by the financial crisis in 2008 – falling to a low of 276p in 2009.
Over the following decade, British Land began to recover and by 2018 it was trading at a yearly average of £5.50 per share. According to its annual report, shareholders received 37.4p per share in dividends for the year.4
SEGRO plc, formerly known as Slough Estates, is a UK-based property investment and development company that focuses on business spaces and warehouses. The company listed on the LSE in 1949 and is also a member of the FTSE 100 – although it has been deleted and reinstated from the index multiple times.
It became a REIT in 2007, at which point it was also rebranded as SEGRO. Although it suffered during the financial crisis, the increasing demand for large warehouses from online retailers caused shares of SEGRO to rise by 80% between January 2014 and January 2019.
While there are no signs that ecommerce is going to slow down anytime soon, concerns have been raised that shares of SEGRO are overvalued compared to their earnings – the company reported a book value of £6.03 per share, but was trading at £6.37 in January 2019.
REITs summed up
Whether REITs are due for a period of growth or decline, you can access a wide range of opportunities by speculating on their price with derivative products.
Although REITs tend to be used for longer-term investment, there are still significant market movements around key political, social and economic events. This means that there could be interesting short-term volatility playing out across the share prices of REITs.
Keep an eye on events that could move the share prices of REITS with our news and trade ideas.
If you don’t feel ready to trade REITs with a live account, you can practise trading in a risk-free environment with an IG demo account. You’ll be given £10,000 in virtual funds, which you can use to build your REIT trading strategy without risking any real capital.
2Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
4British Land, 2018
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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