Thursday 24 November 2011

Portfolio Target: Just REIT!

In a recent post we saw that - in the US - REITs (Real Estate Investment Trusts) had been a more volatile asset class, but have had a higher return (since the late 90s) than dividend shares, shares in general or government bonds.

So, looking at the UK market, are there any likely REIT targets for the DIY Income Investor portfolio?

The UK Government established the REIT status in 2007  (based on the US model) with the aim of improving overall investor access to real estate. Real Estate Investment Trusts (REIT) are companies which are exempt from corporate taxation on profits from property rental income and capital gains on the sale of investment properties.

REITs must distribute 90% of UK rental income in the form of property income dividends (PIDs). The consequence of this is to make the tax implications of investing in REITs similar to that of investing directly in property. REITs are also required to meet certain conditions including the proportion of total profits and assets accounted for by their property rental businesses. They remain liable to corporation tax on non-property investment businesses e.g. management fees and interest receivable.

Looking at the FTSE 100 one REIT immediately pops out: British Land (BLND), with a dividend yield of over 5% and a p/e of under 6! First half-year results are positive, with profit before tax and Net Asset Value up, with the dividend maintained.

British Land is huge and appears to be well managed. To quote their latest report"British Land is one of Europe's largest Real Estate Investment Trusts (REITs) with total assets, owned or managed, of £15.6 billion (British Land share £10.2 billion), as valued at 30 September 2011. Through our property and finance expertise we attract experienced partners to create properties and environments which are home to over 1,000 different organisations and visited byover 250 million people each year. Our property portfolio is focused on prime retail locations and Central London offices which attract high quality occupiers committed to long leases. Our occupancy rate of 98% and average lease length to first break of 12 years are among the highest of the major UK REITs."

But what about the terrible retail Christmas period we are about to have? Retail assets account for 62% of their portfolio, but over 80% of these are located at prime out-of-town sites - much less vulnerable than the traditional High Street shops.

However, continued economic depression - as seems likely - may well slow the pace of recovery in performance. Chris Grigg, chief executive, echoed other property companies in warning that the fallout from the eurozone crisis could have longer-term consequences for the UK property market.

The FT has commented positively on British Land: "Those with fixed assets are usually first to suffer in a storm. Accordingly, property investors are in defensive mode. The sector has taken a pounding during the past six months, with most real estate investment trusts trading at hefty discounts to NAV. Among the companies, however, the risk profile varies greatly. British Land’s strong London exposure and well pre-let development pipeline puts it at the safer end of the spectrum. Its shares barely reflect this, trading at a prospective year-end price to NAV of 0.83 times, compared with the sector on 0.8 times. The company’s 5.1 per cent dividend yield is also 1 percentage point above that of its peers. While the sector remains risky, British Land offers a cheap opportunity to get protection against the worst, while providing a shot at cashing in on a recovery. "

Looks like a potential pot of gold to me!

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. Property companies are issuing warning post that the fallout from the eurozone crisis could have longer-term consequences for the UK property market. It may take some time before the crisis stops.
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