Understanding Real Estate Investment Trusts (REIT)

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Written by J S

November 06, 2023

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Investing in property offers numerous attractive opportunities. The appeal lies in the potential for capital growth, as property prices rise over time. This sets property apart as a ‘non-correlated’ asset, complementing traditional investments like bonds and stocks.

The benefit of independent performance makes property investment appealing within a diversified portfolio. Additionally, property investment goes beyond mere financial gains by providing a reliable income stream through rental payments.

REIT: A Practical Choice

For those interested in property investment but hesitant about becoming a landlord or facing financial constraints for deposits and mortgage repayments, an alternative is property funds. As such, Real Estate Investment Trusts (REITs) stand out as a practical choice. Operating like mutual funds, REITs pool capital from various investors, offering a route to earn dividends from real estate without the complexities of property management.

REITs originated in the US in the 1960s and arrived in the UK in 2007. Their core purpose is to provide exposure to a diverse portfolio of properties through a single investment, catering to various property sectors.

Generating Investor Income

Listed on stock exchanges such as the London or New York Stock Exchange, REITs function as investment trusts, aiming to generate income for investors instead of traditional securities like bonds or equities. Catering to specific property sectors, specialisation is a key feature, with REITs focusing on areas such as apartments or office blocks. Additionally, REITs must own and rent out commercial or residential properties, with a significant portion of profits originating from rental income.

From a tax efficiency perspective, REITs offer strategic advantages. Investors can use their dividend tax allowance on other investments and holding REIT shares within tax-sheltered accounts like ISAs or private pensions eliminates income tax on distributions.

REITs fall into two primary categories: property trading companies and collective investment vehicles. The former includes listed property companies, while the latter operates similarly to an investment trust, with a specific focus on the property market.

Risks and Rewards Without Direct Ownership

The London Stock Exchange aptly describes REITs as a means for investors to access the risks and rewards of holding property assets without direct ownership.

In conclusion, for investors seeking diversification, strategically including property and REITs in their portfolio could prove beneficial.

Beyond financial gains, selecting a property sector on an upward trajectory ensures potential benefits from increased demand, rising property values and competitive rental income. Property investment unfolds as a versatile avenue, combining financial wisdom with strategic planning.

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