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Are REITs a reliable alternative to investing in UK property?

The UK is obsessed with property with many TV shows and magazines running on the subject, be it buying, investing or renovating. But for most people, this is just a dream, as UK property prices are high and it is difficult to obtain the required capital, as well as the barrier to entry of banks using strict lending criteria. .

However, due to the Finance Act of 2006, legislation for REITs was introduced and became effective in January 2007. A real estate investment trust (REIT) is a company that owns real estate that generates income and, in most cases, it exploits them. REITs are designed to provide a real estate investment structure similar to mutual funds that provide investments in stocks. UK REITs are strong income vehicles, as they have to pay out 90 per cent of their taxable income as dividends to shareholders.

There are, as of 2015, 27 REITs in the UK with a combined market value of £47 billion. There has been a flourish in the growth of UK REITs since changes to the REIT legislation were made in 2012, notably the abolition of the initial two per cent charge. REITs have now become a staple for income investors over the last decade now that the market has settled down. Few options offer the same potential for high and rising cash payments, built-in inflation coverage, and diversified exposure to an otherwise off-limits asset: commercial real estate. The idea of ​​REITs has now caught on not only in the UK but also in Europe and parts of Asia. REITs are now a globally accepted means of trading property on stock exchanges.

An example of a wealthy businessperson who has built a fortune from a diversified real estate empire has close ties to the royal family in the UK. Gerald Grosvenor, Duke of Westminster, is the richest person in Great Britain due to his interests in the Grosvenor Group. The corporation has offices in 18 cities around the world, some of which are located on the most valuable piece of land in London’s West End. Although an investor cannot invest with Duke unless they are a high net worth individual, it shows the possibilities of building wealth through diversification with publicly traded REITs.

The UK REIT market still lags behind the US and as such many of the UK REITs were formerly property developers. REITs in the UK are still focused on real estate development rather than the owner aspect, unlike much of the US market which is more focused on providing investors with income through dividends.

At the moment there is only the option to buy equity REITs, those who own and operate their own properties. In countries like the US, there are mortgage REITs and hybrid REITs.

An equity REIT buys and develops properties for ownership as part of its rental business. Properties may include residential flats or apartments, industrial buildings, shopping malls, offices, and storage buildings. Equity REITs may also be geographically involved when they purchase property to develop in a given area. Workspace Group is an excellent example where a REIT buys office and industrial buildings in the London area.

An investor is presented with different, sometimes conflicting, investment strategies when investing in an equity REIT. Some equity REITs will seek what is known as a commercial lease or ‘triple net’ which provides slow, steady growth and high dividends. Other equity REITs buy new properties to develop providing low dividends but high growth.

There are currently no mortgage REITs in the UK, although several real estate organizations have called for their introduction. In 2012, there were calls for Chancellor George Osborne to introduce mortgage REITs in the UK as part of his budget. The British Property Federation declared that the UK had missed an opportunity for a new source of capital in an industry that is hungry for debt.

The UK REIT market is still in its infancy, but it offers potential for at least a growing sector of alternative property investment for the average individual investor.

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