The acronym REIT stands for Real Estate Investment Trust. A REIT can be a company – or a group of companies – that owns and manages (rents out) either residential or commercial (or both) property for its shareholders. The only exception is that it can’t let out and manage owner-occupied buildings.

Because it’s a REIT, the company doesn’t have to pay corporation tax on any profits. However, it does have to give to investors at least 90 per cent of its taxable income every year – moving the profits from corporate (company) status to investor (individual) level. Individuals are then taxed against the income as they would be with a direct property rental business, since it is described as a ‘dividend.’

REITs permit anyone to invest in property, just as they would other forms of investments such as the manufacturing industry, retail etc. In particular they allow individual investors to benefit from the potentially lucrative commercial property rental market.

In order to become a REIT a company’s profits must be at least 75 per cent derived from property rental and a similar percentage must comprise cash or assets in property rental.

In the UK, REITs are usually in three distinct property sectors – residential, commercial and industrial. This includes offices, hotels, warehouses, shopping centres, flats and resorts.

Pros and cons of investing in REITs

Pros.

Because UK REITs are listed on the Stock Exchange or the Alternative Investment Market (AIM) they benefit from a number of tax efficiencies as well as potentially high yields (thanks to the fact it is specialists who are investing the money). REIT’s can also be easy to either buy or sell on and they offer investors far more choice when it comes to investing in property. For instance, it allows anyone to get involved in property without actually having to own any assets or deal with the property directly as a landlord would.

Another benefit of a REIT is that its investments will typically be spread over a number of different rental properties, meaning profits from successful investments can make up for poor returns – or even losses – from others. And those investments can be good ones too, such as car parks and shopping centres.

Cons.

REITs don’t have the cash to build up much capital (because they have given most of their profits to investors) so it means they can get into debt quite easily. This is usually measured by how much of the portfolio is funded by borrowing. Going in to debt saves the REIT from asking investors for more cash, but it does increase the risk of the company going bust – especially if the property market encounters a slump.

REITs aren’t supervised by the Financial Conduct Authority (FCA) so in the event the company went bust you would have to attempt to claim back your savings from the Financial Services Compensation Scheme (FSCS). Also, REITs won’t appeal if you’re the type of property investor who likes to be ‘hands on’.

How to invest in REITs

In order to potentially benefit from a REIT, you must first buy shares in it. This is usually done through a broker or an investment scheme which specifically invests in REITs. It’s also possible to invest in a REIT via an ISA or Self-invested Personal Pension (SIPP).