Many investors consider property to be one of the safest investments around. However, buying, financing and maintaining your own property portfolio requires a lot of work and a lot of capital — two things a large percentage of investors don’t have available to them.
This is where real estate investment trusts or REITs come in handy.
Buying a property portfolio
REITs like British Land (LSE: BLND), Hammerson (LSE: HMSO) and Land Securities (LSE: LAND) give all investors access to a well-diversified, managed property portfolio at the click of a button. What’s more, they offer a relatively reliable income stream, and you can buy REIT shares when they’re trading at a discount to their underlying net asset value (NAV), something you certainly can’t do with traditional bricks and mortar property investments.
Take British Land for example. British Land became a REIT when the structure was introduced back in 2007, and right now the company’s shares support a dividend yield of 3.8%. Moreover, British Land is currently trading at a discount to NAV or the value of its property minus debt.
In November, the company reported a 7.5% rise in half-year NAV to 891p. So at current prices, British Land’s shares are trading at an 18% discount to NAV. To put it another way, by buying British Land shares, you’re buying a London property portfolio at 18% below market value.
The same sort of discounts are available across the REIT industry.
A discount to NAV
Land Securities is the UK’s largest REIT and one of the largest property companies in the country. At the end of September, the NAV of Land Securities’ portfolio was pegged at 1,419p so at current prices the shares are trading at a discount of 19.5% to NAV. Further, the group has a healthy pipeline of properties under development, so the NAV should push higher over time. Land Securities’ shares currently yield 2.8%.
Hammerson reported a NAV of 710p at the end of 2015, 15.5% above the current share price of 601p. Hammerson’s shares currently support a historic dividend yield of 3.7%.
Tax benefits
To get the most out of any REIT, it’s best to hold the shares in an ISA. REITs pay a special type of dividend called a property income distribution. These are slightly different from the dividends paid on most ordinary shares as 20% of the dividend is withheld and paid to the government.
If you hold the shares of a REIT in a tax efficient wrapper such as an ISA or SIPP, the broker managing the account can usually claim back the additional tax paid, so you receive 100% of the distribution. Generally speaking, this makes REITs more tax efficient than owning and managing your own property portfolio. That’s without taking into account the time and money saved by having someone else handle the property portfolio.