Imagine investing in property WITHOUT being a landlord, dealing with agents, solicitors, tenants, councils, utility companies and tradesmen…
Well with REITs you can pretty much do that, but there are some downsides that you need to consider.
When starting out as a landlord you’ll see so many strategies out there for investing in property and they all require different amounts of effort and money.
A popular question for people starting out in property investing is the question of whether they should even bother with buy-to-let property or if they should buy REITs instead…
Quick Summary:
If you had to choose between the two…
REITs can be good for people who want to be very hands-off, want liquidity, want to be diversified, or might not have the capital to invest in buy-to-lets yet.
Buy-to-let investing is good for investors who want full control, want to benefit from higher ROI using leverage, like to use creative methods like BRRR, like to add value to their investments, and have the capital to do so.
What Is A REIT?
A REIT is a Real Estate Investment Trust and they operate as a company that you can buy and sell shares of similar to how you buy a stock.
A REIT in the UK can own and operate properties that can be across various sectors of real estate.
This lets you to invest into a diversified portfolio of properties through the REIT rather than just a single 2 bedroom house down the road.
The REIT purchases and owns properties and it lets investors put money into the REIT instead of directly into the underlying properties.
This lets the REIT pool together money from investors to purchase more properties while giving the investors the benefit of added liquidity.
Here are some key facts you should know about REITS:
- REITs in the UK must distribute 90% of their property rental income to shareholders each year
- REITs can consist of properties across various sectors like commercial, retail, residential etc.
- Reits can be bought and sold similar to how you would buy stocks and shares
- A reit has to consist of 3 or more properties and 1 property cannot exceed more than 40% of the total value of the REIT. (with some exceptions)
- Different REITs may focus on different types of properties.
Let’s go over some of the pros and cons of investing in REITs.
Pros of Investing In REITs:
Diversification: REITs allow investors to spread risk across multiple properties and sectors, reducing exposure to individual property risks.
Liquidity: Shares of REITs can be bought and sold easily on the market, providing more liquidity compared to physical properties.
Professional Management: REITs are managed by experienced professionals, relieving individual investors of day-to-day property management responsibilities. (you don’t have to do the duties of a landlord)
Diversification: REITs allow investors to spread risk across multiple properties and sectors, reducing exposure to individual property risks
Access to Different Sectors: REITs cover various property types like residential, commercial, industrial, and more, offering exposure to a wide range of real estate markets.
No experience needed: You don’t really need to know a million things about property to get into REITs so it’s a fairly stress-free way to get into property investing.
Of course, do your due diligence on the REITs you’re interested in, and remember you can lose all your money if a company goes bust.
Low barrier to entry: You can invest with a fairly low amount of money since you don’t have to buy the actual properties yourself.
E.g. you could put in just £5000, £500, or even £50 into a REIT through an online platform like Hargreaves Lansdown.
This is in contrast to putting down at least £20,000 or so, even for a cheap £80,000 buy-to-let property in the North of England.
- Related Reading: Capital Needed To Invest in UK Property
So there are some benefits to REITs but what about the drawbacks?
Cons of Investing in REITs:
Market Dependency: The value of REITs can be influenced by market fluctuations and investor sentiment, not solely based on underlying property values. (but I guess the housing market can be similar)
No experience gained: You won’t really gain any experience related to property investment or development as you would if you managed your own projects instead.
Dividend Dependence: REITs are required to distribute a significant portion of their income as dividends, which may fluctuate depending on the performance of the real estate market.
For example, during Covid-19 British Land had to temporarily pause dividend payments due to a lack of profits.
Residential properties don’t suffer from a lack of rental demand as much in economic downturns (People always need a place to live), but depending on the REIT it might be focused on commercial property which can leave you more exposed to recessions.
Can’t add value: similar to the last point, you can’t do anything yourself to increase the value of your investment.
With a buy to let you could do a refurbishment project to add value to an undervalued property
Lower Control: You don’t really have any control over what properties are bought within the REIT, how they are managed or how they are developed.
Out of all the disadvantages of REITs, the biggest ones are the lack of control and that you can’t add value or be creative with your investment.
For example, with buy-to-lets you can do things like find BMV investment properties or carry out refurbishment projects that can drastically boost your return on investment.
Before we move on to buy-to-lets and their pros and cons let’s cover some commonly asked questions about REITs.
REIT FAQs
How Many REITs Are There In The UK?
At the time of writing (August 2023) there are 56 REITs listed on the London Stock Exchange but there are other REITs that focus on UK property that are listed on other stock exchanges.
In terms of the REITs listed on the London Stock Exchange, they have a total market capitalization of over $70 billion.
What Is The Biggest REIT In The UK?
At the time of writing (August 2023) the largest REIT listed in the UK is Segro Plc (SGRO) which has a market cap of around £9.14 billion.
This is followed by Land Securities Group Plc (LAND) at a market cap of around £4.75 billion and British Land Co (BLND) at a market cap of around £3.08 billion.
See the links below for more up to date information about these REITs:
What Is The Longest Lasting REIT In The UK?
Technically REITs only became a thing in the UK on January 1, 2007, but some of the companies that became REITs have lasted for a long time before that.
The oldest company that has now become a REIT is British Land which was formed in 1856, making it over 165 years old.
Buy to Let Investing
If you’re on this site you probably already know this.
But just to refresh you…
Buy-to-let investing is when you buy a property for investment purposes on a buy-to-let mortgage instead of a residential mortgage.
You will need to put at least 25% down for these types of mortgages.
You then rent the property out to tenants, potentially after doing a refurbishment project to increase the market rent and property value.
Over time you will generate rental income and potential capital appreciation if you’ve bought in the best investment areas.
Pros of Buy-to-Let:
Tangible Asset: BTL properties offer investors a physical asset they can control, renovate, and directly influence its value.
Rental Income: Investors can earn regular rental income, which can help cover mortgage payments and provide a passive income stream (and you can influence the rent achieved by doing work on the property).
Potential Capital Appreciation: Property values may increase over time, providing potential capital gains when the property is sold.
Greater Control and Creativity: Investors can make decisions regarding property management, tenant selection, and rental terms.
You can also do creative methods like BRRR (buy refurbish refinance rent) to make your money go further.
Leverage: You can purchase an asset with only 25% of the value because you only put down a 25% deposit with buy-to-let mortgages.
For example, you can own a £100,000 asset with only a £25,000 deposit (plus monthly interest payments).
By doing this you tend to boost your cash on cash return compared to other types of investments.
Cons of Buy-to-Let:
Less liquidity: Compared to REITs, selling a physical property can take time and may involve higher transaction costs.
It can take months to sell and complete a property. But taking your money out of a REIT could be done in a matter of days.
Property Management: Active property management can be time-consuming and requires dealing with maintenance, tenant issues, and legal responsibilities.
Lower Returns: Remember before anything happens remember that the REIT has to pay out 90% of profits (not 100%), so you;ve already lost some margin here. And keep in mind that profits will be affected by the running costs of the REIT.
The lack of control also means you have less opportunity to add value and improve your ROI on your investment.
Less diversification: BTL investing can lead to higher risk if the property is located in a single area or market that experiences a downturn.
For example, if you have just one buy-to-Let property then all it takes is for the tenant to stop paying for you to start making a loss pretty much instantly.
But in a REIT the portfolio is normally spread across a wide range of properties.
Should I Invest in REITs or Buy to Lets?
In general, Buy-to-lets are better than REITs for Investors who:
- Want more control and over their investments to use creative methods and be able to add value
- Want to grow their own portfolio
- Want to actively manage properties (or hire a property manager)
- Have enough capital to put down deposits for Buy-to-Let property
- Want higher returns over time
In general, REITs are better than rental property for investors who:
- Want a hands-off, feet-up approach to investing in the UK property market
- Want liquidity to easily be able to sell their shares and retrieve the value of their shares
- Want an easy way to have a diversified portfolio in UK property without actually managing or purchasing any properties themselves
- Don’t have enough capital for a buy-to-let deposit, but still want to be exposed to the UK property market.
Where Can I Buy REITs From?
If you’re wondering how to buy a REIT then don’t worry, it’s fairly easy in the UK.
First find a REIT that you want to buy and do your research.
You can use this list of REITs on the London Stock Exchange to get started.
Then you need to find a broker that you can purchase your REIT through and make an account with them.
Hargreaves Lansdown is one of the biggest in the UK and has over 1.5 million customers.
You can buy REITs through Hargreaves Lansdown and hold them in different types of accounts.
For example, at the time of writing you could buy shares of British Land (BLND) using any of the following Hargreaves Lansdown accounts:
Further Reading
If you’re interested in learning more about REITs then these resources should help you.
- List of REITs on the London Stock Exchange
- Reit.com – this is more focused on US REITs but a lot of the informaiton is still useful in understanding REITs in the UK.
Also see the video below which is a helpful guide to REITs in the UK.
Useful video about REITs by Damien Talks Money
If you need a bit more info about investing in property you should read our post on why you should and shouldn’t invest in UK property.
Available capital is one of the main reasons people invest in REITs, but you might already have enough money to invest in UK property without needing to invest in REITs.