Part 2 — Asset Classes
Chapter 9 of 40
Real Estate and REITs
Property investing without being a landlord or owning a boiler
"Property has made more ordinary people wealthy than almost any other asset class. The problem: it requires a large deposit, a mortgage, and years of dealing with tenants and boilers. REITs solve all three problems."
For educational purposes only. Nothing in this chapter is financial advice. All figures are illustrative examples. Tax rules, account types, contribution limits, and regulations differ by country and change over time. Always verify current rules with official government sources or a qualified financial adviser before making any investment decisions.
What Is a REIT?
A Real Estate Investment Trust (REIT) is a company that owns and operates income-producing property. Instead of buying a property yourself, you buy shares in a REIT — and it does the owning, managing, renting, and collecting for you.
REITs are legally required to distribute at least 90% of their taxable income to shareholders as dividends. This means they function like property-owning dividend machines. You get exposure to real estate returns without a mortgage, without a letting agent, and without ever receiving a call about a broken boiler.
🏠 Direct Property
- Requires 10-25% deposit
- Illiquid — takes months to sell
- You manage tenants or pay an agent
- Concentrated — one property, one location
- Stamp duty, legal fees on entry
📊 REIT
- Start with £1 — no deposit needed
- Sell any day the market is open
- Managed professionally
- Diversified across many properties
- No stamp duty or legal fees
Types of REITs
REIT Risks to Understand
REITs are not a free lunch. They carry specific risks you need to understand before buying.
⚠️ Key REIT risks
Interest rate sensitivity
REITs borrow heavily to buy property. When interest rates rise, their borrowing costs rise and their property values fall — REITs typically sell off significantly when central banks hike rates (as happened in 2022-23).
Sector-specific risk
Retail REITs suffered badly when online shopping reduced demand for physical shops. Office REITs face uncertainty from remote working. Always understand what the REIT owns.
Dividend cuts
The 90% distribution requirement means REITs pay out most income. In a downturn, if rental income falls, dividends are cut — often sharply.
Tax treatment
REIT dividends are often taxed as ordinary income rather than the lower dividend tax rate. In a Stocks and Shares ISA, this does not matter — in a general account, it does.
Questions People Actually Ask
How do I buy a REIT?
The same way you buy any share — through a broker or investment platform. UK REITs trade on the London Stock Exchange. US REITs trade on NYSE and NASDAQ. You can also buy REIT ETFs for instant diversification across dozens of REITs (e.g. iShares UK Property ETF, Vanguard Real Estate ETF VNQ in the US). REITs work well inside an ISA or SIPP where dividends are sheltered from income tax.
What yield do REITs typically pay?
UK REITs have historically yielded 3-6% in dividends. US REITs have historically yielded 3-5%. This is often higher than equity dividends because of the 90% distribution requirement. However, high yield today does not guarantee high yield tomorrow — property downturns cause dividend cuts.
Do REITs grow in value or just pay dividends?
Both, ideally. Total return from a REIT = dividend income + share price appreciation. Over the very long term, property values have historically risen with inflation or above. But REITs are not guaranteed to appreciate — office REITs, for example, have significantly underperformed the broader market since 2020.
Are REITs good for income investors?
They can be — but the 90% distribution rule means they retain very little to reinvest in growth, so capital appreciation is more limited than growth stocks. For a retirement income portfolio, a diversified REIT ETF alongside dividend-paying stocks is a sensible combination.
Key Takeaways
- A REIT lets you own commercial or residential property without a mortgage, a letting agent, or a minimum six-figure sum.
- REITs must distribute at least 90% of taxable income as dividends — making them high-income assets by design.
- Major types: residential, commercial, industrial, healthcare, data centres. Each behaves differently based on its tenants and lease structures.
- Key risk: interest rate sensitivity. Rising rates hurt REITs via higher borrowing costs and lower property valuations.
- Hold REITs inside an ISA or SIPP to shelter the high dividend income from income tax.