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Property & Real Estate Taxation

UK REITs. What are they? And how do they work?

By : Esper Wealth
April 14, 2022
UK REITs. What are they? And how do they work?

In this article, we look into UK REITs, (Real Estate Investment Trusts) and explain how they work. We also discuss their tax advantages.

A Real Estate Investment Trust often abbreviated to REIT is a simple yet effective way to tap into returns from UK property. This includes residential property, commercial property and property development profits.

The top UK REITs invest their capital into a wide range of property assets and projects and pay an attractive income yield to investors. There are also some great tax breaks.

What is the advantage of investing in a REIT?

Ordinary company profits are initially subject to corporation tax (currently 19%) before they’re distributed as dividends and taxed as dividend income for the individual investor. This is a form of double taxation, and it makes earning rent via a trust or company very inefficient compared to directly investing in property as an individual. 

A REIT receives a corporate tax exemption for rental income, subject to the rules above. This allows net rental income to pass through to an investor without incurring the ‘double tax’. With the same underlying property investments, a REIT would provide a higher shareholder return than a standard investment trust. This is why UK REITs are such a popular vehicle for investing in property.

The London Stock Exchange (LSE) identifies the following benefits of REITs for UK investors:

  • Tax transparent
  •  Potentially high-yield returns
  •  Access to property for minimal outlay
  •  Low/controlled gearing
  •  Portfolio diversification (low correlation to equities and bonds)
  •  Liquid asset
  •  Strong corporate governance.

The LSE states that REITs offer the following benefits for companies:

  • Tax efficient structure
  •  Access to new investors/capital
  •  Performance more closely aligned to net asset value (NAV)
  •  Acquisition currency.

What qualifies as a REIT?

To be able to use the REIT brand name, a property investment trust must:

  • Be listed on a recognised stock exchange with at least 35% of the quoted shares held by the wider public, and not a closed group of 5 or fewer individuals.
  • Distribute 90% of its tax-exempt property income profit each year as a dividend
  • Be diversified across at least three properties with each representing less than 40% of the total trusts’ assets
  • Invest 75% of gross assets into property rental assets (this can include buy-to-rent property projects)

When and Why were UK REITs created?

UK REITs were created in 2007 to help out the UK property sector. The bursting of the subprime lending bubble impacted banks’ solvency and the banks were unable to lend money. This impacted property companies that couldn’t get funds to complete developments. REITs solved this problem by incentivising investors to invest in real estate companies.

How many UK REITs are there?

Currently, there are over 50 UK REITs. The table below lists them according to size by market capitalisation.

NameMarket Cap (£’m)
SEGRO Plc15,980
Land Securities Group plc5,248
British Land Company Plc4,799
The Unite Group plc4,447
Tritax Big Box REIT Plc4,232
Derwent London Plc3,824
Big Yellow Group Plc2,802
Safestore Holdings plc2,627
Shaftesbury PLC2,517
LondonMetric Property Plc2,482
Primary Health Properties PLC2,062
Assura Plc1,955
Great Portland Estates Plc1,919
Workspace Group plc1,551
Capital & Counties Properties PLC1,486
Hammerson plc1,430
Secure Income REIT Plc1,319
Supermarket Income REIT plc1,172
LXI REIT1,023
UK Commercial Property REIT Limited982
GCP Student Living PLC958
BMO Commercial Property Trust Limited758
Target Healthcare REIT plc743
Hibernia REIT Plc739
Warehouse REIT PLC681
Home REIT Ltd643
Urban Logistics REIT plc585
Civitas Social Housing Plc565
PRS REIT560
Picton Property Income Limited532
Empiric Student Property plc532
Stenprop Limited529
Regional REIT Limited459
Custodian REIT Ord431
Impact Healthcare REIT plc415
Triple Point Social Housing REIT plc391
Standard Life Investments Property Income Trust Limited296
Schroder Real Estate Investment Trust Limited245
NewRiver REIT plc241
BMO Real Estate Investments Limited203
McKay Securities Plc197
AEW UK REIT Ord170
Residential Secure Income plc169
Ediston Property Investment Company164
Schroder European Real Estate Inv Trust135
Yew Grove REIT PLC125
Ground Rents Income Fund Plc73
Capital & Regional Plc70
Real Estate Investors plc70
Town Centre Securities PLC66
Alternative Income REIT PLC59
Highcroft Investments Plc45
Drum Income Plus REIT Ord19
KCR Residential REIT plc8
Table taken from Financial Expert

UK REITs performance

The FTSE 350 Investment Fund Index shows a gain of 13.94% over the past 12 months. This is pretty impressive since 90% of returns are sent back to investors in the form of income.