Real estate investment trusts (REITs) have become an important force in global property markets, with more than 1,000 vehicles worldwide and a combined market capitalisation of around £1.5 trillion.
The UK is home to 163 listed and private REITs, including major players, such as SEGRO, Landsec and British Land, and the number appears to be growing as new opportunities emerge and changes to rules broaden the base of investors able to invest via REIT structures.
At their core, REITs are specialist property investment companies that allow investors to pool funds and gain exposure to income-producing real estate, ranging from offices and logistics hubs to care homes and residential portfolios.
They benefit from doing without the double layer of taxation that often applies in corporate structures, but to qualify, a REIT under UK regulations must (amongst other rules):
The model effectively mimics direct property ownership from a tax perspective for investors on the rental business’s income, while offering the liquidity and transparency of listed shares.
Several factors are making REITs especially attractive within the current property market:
The recent increase in Corporation Tax from 19 per cent to 25 per cent has further increased investor interest in the regime.
This is because many international investors could see an effective rate closer to 20 per cent or even less, depending on exemptions or treaty rates that are in place.
For REITS, rental profits and capital gains are also distributed before tax and properties are rebased to market value on entry and exit.
As a result of these benefits, the regime itself has proved remarkably stable since its UK launch in 2007.
There are several hurdles that prevent a sudden spike in REITs. The qualification process, which requires strict asset and ownership tests, has prevented some entrants from taking the next step.
Additionally, development gains may still be taxable under the “three-year development rule”. Under this rule, if development costs exceed 30 per cent of a property’s value and the property is sold within three years of the work being completed, any profit from the sale becomes taxable.
REITs also have to contend with compliance failures that can lead to penalties or even ejection from the regime.
On top of this, public REITs also face the risk of trading at a discount to net asset value during downturns, undermining the promise of stability upon which they are built.
Despite these challenges, market voices suggest momentum is building, with entrepreneurs like Harry Fenner calling them a “strategic move that signals maturity, focus and a clear commitment to sustainable income distribution”.
With strong interest from residential, health, care and logistics platforms, more firms are likely to make the switch in the years ahead.
For investors and property groups alike, the REIT regime is no longer niche – it is fast becoming the default UK structure for long-term, income-driven property investment.
If you would like guidance on becoming a REIT or the benefits it may offer, please get in touch with Partners, Neil Williams (neilwilliams@lubbockfine.co.uk) or Rob Hoad (roberthoad@lubbockfine.co.uk)
