Buy land – they’re not making it any more!

How investments in commercial property can give your income a boost

INVESTORS with a portfolio of shares, bonds, commodities and cash might feel smug in the knowledge that they have spread their money wisely.

But there is another asset class worth considering – Real Estate Investment Trusts. Known as Reits, they can provide you with a stream of steady income through investing in various types of property.

WHY PROPERTY IS PRUDENT

THERE is a strong case for investing in UK property.

Russ Mould of fund platform AJ Bell says: ‘As the American writer Mark Twain once said, “buy land, they’re not making it any more”.’

He adds: ‘Real estate is a finite asset, especially on a crowded island such as Britain. In theory, as the economy grows over time, land values and rents for commercial properties such as offices, shops and industrial units will rise.’

A Reit invests in a portfolio of commercial property. Its shares are listed on the stock market and can be bought and sold easily.

Managers of Reits are given generous tax breaks to appeal to investors. They pay no tax on the rental income generated as long as 90 per cent of it is distributed to the trust’s shareholders by way of dividends.

Investors do not pay stamp duty on share purchases and the Reit can be held in a tax-friendly Isa, protecting all income and capital gains from tax.

There is a wide choice of trust – from those investing in warehouses and supermarkets, to doctors’ surgeries and social housing. Rental income from the properties often rises in line with inflation, which is a boost for income seekers.

Dividend yields are attractive. They range from 4.7 and 5.9 on Reits from familiar names Schroder and BMO respectively, to 8.4 per cent on AEW UK, a specialist in industrial and office spaces.

But it is important to look at overall return. Over five years, AEW UK has generated a total return – income plus capital – of 16 per cent, while GCP Student Living has delivered 86 per cent, despite paying a dividend of just 3.8 per cent.

Trusts investing in student accommodation are proving popular. Gravis Capital Management launched GCP Student Living in 2013 because of growing demand for high quality student accommodation. Its managers Nick Barker and Tom Ward mainly purchase London developments due to the high concentration of overseas students.

Barker says: ‘Bad debts are very low in this category as parents of international students often pay rent upfront for their children.’

The properties are well equipped with communal spaces, gyms and cinema rooms. The minimum allinclusive rent ranges from £175 a week for a small double at its site in Wembley, North-West London, to £635 for a ‘premium’ room at its property in central Bloomsbury.

Jason Hollands of wealth manager Tilney says: ‘ The student accommodation market is relatively economically insensitive, with rental contracts often agreed with universities and not just direct with student tenants.’

A LIQUID ASSET YOU CAN TRADE IN

MANY investors remain sceptical when it comes to commercial property because of uncomfortable memories of the 2008 financial crisis and the aftermath of the 2016 Brexit referendum.

On both occasions some property funds – but not Reits – slammed the gates shut on investors by suspending dealings because they couldn’t sell assets fast enough to meet the feverish redemption requests. This is similar to the situation that befell investment fund Woodford Equity Income this summer when a big institutional investor wanted to sell its stake.

Reits do not have to take such drastic action, because they are listed on the stock market. So investors can always sell their shares, albeit at a low price and often at a discount to the value of the trust’s assets. By contrast, property funds are not listed. So the only way they can pay investors wanting out is to raise cash from fire-sale asset disposals.

Liquidity is crucial when it comes to investing in commercial property, according to Annabel Brodie-Smith, a director at the Association of Investment Companies. She says: ‘In 2008 and 2016, some Reits did suffer in terms of recording sharp share price falls, but investors could always buy and sell shares – and when sentiment turned the share prices bounced back.’

She says the benefit of investing in property through an investment trust structure rather than a fund is shown in their long-term performance. Over the past ten years, t he average i nvestment t rust directly investing in UK property has provided a total return of 141 per cent for shareholders, compared with 80 per cent from the average UK property fund.

Reits are currently attracting the attention of some bargain hunters as recent poor performance has made their shares look relatively cheap. Mould, at AJ Bell, says: ‘Some Reits have performed badly recently with their shares trading at big discounts to the value of the assets they hold. They are also trading in a stock market that itself has underperformed, looks unloved and feels potentially undervalued on the global stage.’

WHY REITS MIGHT BE WRONG

HOWEVER, both value and income hunters need to choose their Reit carefully. Mould says: ‘Buyers need to take care if considering Reits with exposure to high street retailers, fashion and restaurant chains.

‘For example, Reit Intu, owner of the Trafford Centre in Manchester, has cut its dividend to zero and seen its share price fall sharply as its rental income has shrunk and the value of its property has declined.’ Failed takeover bids for Intu and Hammerson Reit have raised doubts about the sector.

Brexit and economic uncertainty are also flies in the ointment, with some investors avoiding sectors such as new-builds in London.

Yet interest in the wider sector remains. Reits such as Segro are benefiting from the boom in online shopping through their ownership of logistics hubs and warehouses.

Reits focused on self- storage, such as Safestore, Big Yellow and Tritax Big Box are also popular.

Hollands at Tilney likes Tritax Big Box, as well as UK Commercial Property, which invests in warehouses and industrial properties.

Mould says British Land and Land Securities are worth a look, especially as they shift from retail property to mixed-use developments embracing residential sites.

Other Reits worth considering include Derwent London, which focuses on prime London property, CLS Holdings, which has assets in Europe, and Harworth, formerly the property division of UK Coal. It buys brownfield land, obtains planning consent, cleans up the sites, then sells the land on to third party developers.

Hollands says investors should also look at BMO Global Real Estate Securities, which invests in both Reits and international property shares.

There are also low cost property-linked funds such as iShares UK Property, which yields an income of 3.6 per cent and carries an annual charge of just 0.4 per cent.

Regardless of the type of holding chosen, however, investors are recommended to devote no more than 10 per cent of their portfolio to property.