Reits introduced in 2007
Structure has many benefits and drawbacks
Real estate investment trusts (Reits) are the backbone of the listed property sector. Almost every listed commercial property company has chosen to become one since the product was introduced, but the housebuilders have not.
Understanding why this is and what the appeal of the product is requires a little bit of unpicking.
What is a Reit?
A Reit is a company which owns and manages property on behalf of shareholders. To qualify as a Reit, at least 75 per cent of a real estate company’s profits must come from rental income. This is why UK housebuilders, which sell homes rather than renting them, do not qualify for Reit status. Reits must also distribute at least 90 per cent of their taxable income for each accounting period to investors, which means they need to be publicly listed, and they must be solely resident in the UK for tax purposes.
The businesses which do qualify receive exemption from corporation tax on profits and gains from their UK-qualified property rental businesses, hence their popularity within the listed property sector.
A brief history of Reits
The idea was introduced in the UK on January 1 2007, having been imported from the US which invented the structure in the 1960s. On the day the Reit structure was introduced, the biggest property companies at the time all converted – including British Land (BLND), which called it “a new era for property investment”.
The benefits of Reits
For the Reits themselves, the benefits are obvious: a tax incentive in exchange for giving funds back to shareholders in turn encourages more shareholders to invest because they know the company will pay out.
This is also, of course, what makes a Reit attractive to investors. In addition, as the London Stock Exchange puts it, “Reits provide a way for investors to access the risks and rewards of holding property assets without having to buy the property directly”.
Should I invest in a Reit? If so, which one?
Reits come in many flavours all with their own levels of risk and reward. Every Reit will describe itself as low risk, but this is a misnomer. Every investment is a risk. The only real differences are between the types of risks Reits take.
Many Reits are specialists – as in, they specialise in buying one kind of property. Investing in a specialist Reit means you are tying yourself to that asset class, but it also means you know exactly what sort of buildings your money is going to be used to develop or buy.
If you want to expose your savings to the risks and rewards of the warehouse market, for example, you have several Reits to choose from – all specialising in their own sub-sector within the warehouse market. Tritax Big Box (BBOX), for example, owns large warehouses (of around 300,000 to 1mn square foot) let out on long leases to international businesses in regional areas. By contrast, Urban Logistics (SHED) owns smaller warehouses (of around 50,000 to 250,000 sq ft) typically on the edge of city centres while Industrials Reit (MLI) owns even smaller warehouse assets (circa 1,000 to 10,000 sq ft) which tend to be let out on short leases to small businesses. All three business models have their benefits, and their flaws.
There are a myriad other specialists such as those in the self-storage, supermarkets, offices, retail, hotels and life-science sectors and sub-sectors of the property market as well. The upside to specialism is reaping the rewards of a subsector which is booming. The downside to specialism is watching your shares drop in value if the subsector struggles. Intu went into administration in part because it was poorly managed but also because it was a specialist Reit which owned shopping centres at a time when shopping centres were on their knees.
On the flipside, there are the generalists such as the aforementioned British Land and its main competitor Landsec (LAND) as well as smaller capped generalists like AEW UK Reit (AEWU) which don’t buy one kind of property but spread their risk across several different kinds of asset class.
The upside to this is that your money is not dependent on the success of one particular sector or subsector within the real estate market. The downside is that you don’t have as much control over what sorts of properties your money will go towards.
Some companies thrive under the generalist model, and some thrive under the specialist model. But there are no guarantees either way.
In conclusion
UK Reits have been with us since 2007 and as new forms of property ownership emerge, so too do new forms of Reits. Their existence allows shareholders to have a stake in the sort of property which gets built in this country, but they also expose shareholders to the cyclical downturns of the UK real estate market. No Reit is perfect, but many prudent investors who research thoroughly are able to find a Reit which matches their appetite for risk.
Source: Investors Chronicle