Real estate investment trusts (REITs) are a specific fund type that focus on buying and letting property. They’ve long been popular among passive income investors due to rules that help ensure steady dividend returns.
They also offer simplified exposure to the real estate market without the high cost and risk of direct investment. Let’s have a look at the pros and cons of this unique investment option.
REITs give investors access to large-scale property development projects in residential, commercial and industrial spaces. The relatively low initial investment, combined with an experienced management team, makes them particularly attractive for beginner investors.
What’s more, the rules require them to distribute at least 90% of their taxable income to shareholders annually. This typically leads to high and consistent dividend yields, which is attractive for income-focused investors.
Moreover, they have far higher liquidity than standard real estate, trading on major stock exchanges where the shares can be bought and sold easily.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
While the rules result in higher yields, they also limit retained capital for further investment. This can result in slow or even negative growth, which could eat into returns during weak market periods.
They’re also highly sensitive to interest rate fluctuations, which can limit profits during high-rate periods. In addition, they typically include ongoing management fees which must be accounted for when calculating potential returns.
AEW UK (LSE: AEWU) is an up-and-coming REIT that started life just 10 years ago. Its strategy is to buy assets with shorter leases, aiming to exploit re-letting and redevelopment opportunities. It’s an interesting angle — but one with the added risk of tenant departures and higher vacancy rates.
It’s also very small, with a £167m market-cap, putting it at higher risk of volatility. The advantage being that the market tends to undervalue small-cap shares. As such, it has a net asset value (NAV) of 109p per share with shares currently trading at only 103p.
The past decade has dealt its fair share of ups and down but despite everything, it’s grown about 30% since Covid. Analysts expect the current growth trajectory to continue, with the average 12-month price target up 10%.
