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How to solve a problem like liquidity: REITs and the UK property sector

Real Estate Investment Trusts (REITs) burst onto the UK investment scene in January 2007, sparking an immediate conversion of many of the UK’s largest listed property companies into the new structure. 

In short, a REIT is a closed-ended company which trades on public markets, providing tax efficient investment exposure to property assets.

UK REITs remain relatively small compared to more established sectors in the US and Australia. Nonetheless, it has shown remarkable growth, with changes to REIT legislation in 2012 further encouraging investment into UK property and boosting their popularity among investors. The attractiveness of a structure which offers exposure to property indirectly, without the liquidity issues of having to own the bricks and mortar assets themselves, has certainly wooed investors in the last decade. 

Structurally suited to provide liquid access to what is traditionally a highly-illiquid asset class, REITs can focus on long-term portfolio returns rather than short-term liquidity issues. They have become one of the best performing UK assets and over the past decade UK REITs recorded an annualised return of 9.7%*. In comparison, between July 2009 and July 2019 UK equities returned 9.1% a year, 10-year Gilts returned 8.5% and investments in the IA UK direct property sector returned 6.2% annualised. Furthermore, the dividend yield of the UK REIT index has outstripped inflation over the past decade, offering 4.0% per annum against inflation running at 2.2%.

As well as strong performance and regular income, REITs offer access to sector specialists who are experts in selecting the best assets to provide long-term, dependable cash flows. This is particularly beneficial when looking to invest in more niche areas of the market, such as real estate assets in the logistics, student housing or medical sectors. 

Extreme investor events, such as selling on mass, have prompted liquidity concerns which can impact the short-term share price of a REIT. Unlike exposure to direct property OEICs however, the end investor is protected from the potential of gating. 

In the wake of the Brexit referendum, some open-ended property funds had to close to investor requests and were forced to sell assets to raise cash to meet redemptions. This is something the newly launched VT Gravis UK Listed Property Fund (GULP) will avoid by investing solely in REITs and other, liquid, real estate securities.

The investment outlook

The strongest investment opportunities are those powered by favourable societal mega-trends such as the ageing population, generation rent, technological innovation and urbanisation.  

Demand for GP surgeries and medical centres is likely to increase dramatically as more people live longer. A third of 18-year-old girls today can expect to live into their nineties according to the Office for National Statistics, undoubtedly increasing demand for medical care and services.

Technological innovation on the other hand is powering the rise of internet shopping and the demand for next-day, or even same-day delivery of goods. This trend is powering the need for warehouses and logistics bases and opening up opportunities for investors to provide much-needed capital to support development.