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Investing in listed property
Sarah Moore looks at investing in listed property through a fund, and reveals one cost-effective exchange-traded fund.
Reits invest in income-producing real estate, such as offices
(Image credit: Adam Petto)
The appeal of buying property viaa listed fund was highlighted last summer when many open-endedUK property funds suspendedtrading for months at a time.This was done in order to stem awave of redemptions triggered bya post-EU referendum panic, andleft thousands of investors withno way of accessing their money.While you are not guaranteed toget a good price if selling out of alisted property fund, at least youhave the option of getting out.
Investors looking to buy intoproperty via listed funds have twomain choices. The vast majority(over 80%) of listed UK propertyfunds are structured as real estateinvestment trusts (Reits). A Reitinvests in income-producingreal estate, such as office buildings orshopping centres. They enjoy a specialtax status, under which they pay nocorporation tax on qualifying rentalincome and capital gains, but are obligedto pay out at least 90% of their incometo shareholders. This means the doubletaxation (corporation tax and the taxon dividends) that is associated withordinary property funds is removed.
Reits pay dividends as "property incomedistribution" (PID), which is paid afterdeduction of withholding tax at a rateof 20%. If you're a basic-rate taxpayer,that takes care of your tax liability, whilehigher-rate and top-rate taxpayers willowe further tax. This can be avoidedif the Reit is held within an individualsavings account (Isa) or a self-investedpersonal pension (Sipp), when your stockbroker should either pay the PID gross of tax or reclaim it subsequently.
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An alternative structure for propertyinvestment is the property investmentcompany. Like Reits, these invest inreal estate, but unlike Reits they aretreated like any other company for taxpurposes (and hence pay corporationtax on profits). Dividends paid by thesecompanies are taxed at the usual incomedividend tax rates (7.5% for basic-ratetaxpayers on any dividends over £5,000. 32.5% for higher-tax taxpayers and38.1% for additional-rate taxpayers).
Most UK property companies haveconverted into Reits since the Reitstructure was first introduced to Britainin 2007. However, a few that prefer notto have to pay out the majorityof their income as dividendsand would rather retain it forother purposes for example,reinvestment in new projects have not converted.
Lastly, there are some UK-listedproperty investment companiesthat are incorporated abroadin destinations such as theChannel Islands or the CaymanIslands, where tax rules are morefavourable and they don't pay UKcorporation tax on their income.
This is a relatively commonstructure for UK-listed funds thatinvest in real estate in more exoticlocations that don't have a Reit-liketax structure, such as manyemerging markets.Whether a listed property vehicleis structured as a Reit, a UKcompany, or an overseas company isunlikely to be something that mostinvestors directly take into account.However, in practical terms, most Reitsare geared towards delivering a steadyincome and their portfolios tend tobe made up of established assets. Thismakes them more appealing to investorslooking for a reliable income stream.
By contrast, other property companiesare sometimes more speculative, ofteninvolving early-stage developments, andtherefore can be more risky. A cost effectiveway of investing in a range ofproperty funds is via an exchange-tradedfund. iShares FTSE EPRA/NAREIT UKProperty ETF (LSE: IUKP) invests ina range of UK Reits, though has a biastowards London commercial property,and has a total expense ratio of 0.4%.
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Sarah was MoneyWeek's investment editor. She graduated from the University of Southampton with a BA in English and History, before going on to complete a graduate diploma in law at the College of Law in Guildford. She joined MoneyWeek in 2014 and writes on funds, personal finance, pensions and property.
