Related
news
Shares Magazine
Property has long been a popular choice for people looking to achieve a regular income. Buy-to-let properties were particularly in demand in the first half of the last decade but an increase in tax and regulation has resulted in many people abandoning this option.
Research from the estate agency Hamptons shows the share of homes bought by a landlord in Britain dropped from 15.8% in 2015 to 10.8% in 2025. That is the lowest level since 2007, when it started collecting the data.
Investing for income
The stock market offers an alternative and more straightforward way of getting income from property in the form of real estate investment trusts – known as REITs for short.
These listed vehicles are allowed, in return for extra regulation, a tax regime that almost replicates the situation you would face if holding property directly. The core business of REITs is protected from corporation tax, allowing the distribution of rental payments from tenants to flow straight through to your dividends without being hit by extra levies.
In theory, a REIT should provide good levels of income as they are forced to pay out 90% of the profits from their core business within one year, meaning a steady stream of dividends. Several REITs feature in the FTSE 350 index: including British Land and Land Securities.
A further benefit of investing in a REIT is diversification. Unless you are blessed with substantial amounts of capital then you are unlikely to be able to buy more than one or two properties at most directly. With a REIT you are typically buying exposure to a much larger portfolio of property assets.
REITs’ structural advantage
During spells of volatility, REITs are arguably at an advantage compared to open-ended property funds because they do not expand or contract in size depending on fund inflows and outflows.
They do not have to sell properties to meet redemptions during periods of market panic. Though they may trade at a discount to the estimated value of their assets.
A spate of withdrawals in the wake of the EU referendum and problems with valuing properties following during the covid-19 pandemic led to the suspension of trading in several open-ended property funds.
The fundamental problem is one of providing the ability to trade daily in a fund which invests in an asset which can take a lot longer to buy or sell. REITs’ structure helps them get round this issue.
What do REITs invest in and how have they performed?
Commercial property can be split into three broad categories: offices, retail (shopping centres and retail parks) and industrial (warehouses). However, there are REITs which invest in more niche areas like care homes, GP practices, social housing, science labs and gyms.
Some specialise in a specific category of property, while others take more of a pick and mix approach.
REITs, in common with investment trusts more generally, have suffered in an elevated interest rate environment, which has increased the return people can get on their cash without taking on additional risk.
Something else the REIT space shares with the wider investment trust universe is being targeted by activist investor Saba. Both flexible office space provider Workspace and Life Science REIT, which, as its name suggests, rents properties to the life sciences sector, are in Saba’s crosshairs.
REITs may get some respite in 2026 assuming UK interest rates continue to come down, with many of them offering generous yields.
Among the best performers in the REIT space are Schroder Real Estate and AEW UK REIT, both of which take a diversified approach and invest across offices, warehouses and retail assets.
Investment company REITs vs equity REITs
A distinction is sometimes drawn between investment company REITs and equity REITs.
Investment company REITs are typically externally managed, with a property adviser or manager paid an annual management fee — and sometimes a performance fee — to make investment decisions for the property portfolio.
These decisions remain subject to oversight by an independent board, which ensures the trust continues to meet its stated investment objectives.
In contrast, equity REITs are generally internally managed, making them closer in structure to conventional listed companies. British Land and Land Securities are examples of this model.
Equity REITs are more commonly held by institutional investors such as asset managers and sovereign wealth funds. Investment company REITs, meanwhile, tend to appeal to retail investors and wealth managers, with income often forming a larger component of total returns.
How to check on dividend sustainability
To check on a REIT’s ability to keep paying dividends you can look at its historic track record and its ‘EPRA earnings’ which measure a property company’s core recurring income, excluding volatile items like property revaluations and gains from disposals.
It’s sensible to monitor the level of debt, and particularly the occupancy rate and direction of rental rates, given it is the income from tenants from which dividends are ultimately paid.
It is worth looking beyond these key metrics too. AEW, for example, uses profit from property disposals to supplement regular income, allowing it to pay dividends in excess of its EPRA earnings.
A final point. It is important to be aware that ongoing charges on REITs tend to be higher than for other types of fund thanks to the greater costs and complexity involved in managing a portfolio of properties compared with investing in stock and shares. Even in this context the ongoing charges for Regional REIT are exceptionally high at 9.1%, a number which is inflated by vacancy costs.
Dan Coatsworth: Head of Markets
Dan Coatsworth is AJ Bell's Head of Markets. Dan has been with the company since December 2012 and has more than 18 years' experience in the industry, following the markets and all things investing. He...
