What are REITs?
REITs are companies listed on the UK stock market that own property, primarily commercial. They offer investors access to a diverse portfolio of properties. By buying shares in a REIT, you become a proportionate shareholder of the assets and are therefore entitled to share in the future profits they generate. To ensure favourable tax conditions, REITs must distribute at least 90% of their taxable income to shareholders as dividends, making them an attractive and resilient consideration for income returns within a portfolio.
Why consider REITs?
With the prospect of declining interest rates, investors can buy attractive alternative income opportunities within this sector at currently steep discounts to net asset values.
Watch our video to find out why REITS are an important consideration for income investing in the present landscape.
Current investment landscape
The share prices of REITs have fallen in recent years, largely driven by a wider fall in property prices and post-COVID concerns regarding commercial property investments. For example, a share bought at £1 paying a £0.05 dividend equates to 5% annual income. If that same share was bought at £0.75, the same £0.05 dividend now generates a more attractive yield at 6.67%.
Given the very nature of REITs, the income potential relative to cash appears attractive for those seeking long-term income in a declining interest rate environment. If interest rates start to fall, it could widen the gap between cash returns and alternative income assets like REITs. We could therefore see prices rise as demand for these shares increases.
What are my income options?
There are two core strategies to adopt in generating income returns: a natural income approach and an income reinvestment approach. Natural income might be taken when investors want to use and spend their dividends, typically paid quarterly. This is very common for many clients, particularly in the decumulation phase or income phase of their financial planning. The alternative approach, where income is not needed today, is to reinvest dividends. The advantage here is that you can acquire more shares, increasing your income potential over the longer term.
For example, a £200,000 investment in REITs with a 5% yield could generate £10,000 annually. Reinvesting this income could increase annual dividends to approximately £12,762 after 5 years. While these are indicative figures only and not guaranteed, they provide a hypothesis as to why reinvesting income can be an important part of an individual’s long-term investment strategy.
We hope you find this communication useful and welcome you to contact your consultant today to discuss REITs and other income-producing investment opportunities.
Important information
As with all investments, your capital is at risk. The value of your investments and the income from them may fall or rise and there are no guarantees. Past performance is not a guide to future returns. Tax treatment of investments and income depends on an individual’s circumstances and may be subject to change in future. The content of this article is for information only and does not constitute advice.
