British Land REIT – Must Read this Before Investing

Reader Chris asked what I thought about British Land REIT as an investment.

So in response to Chris, this article takes a look at British Land REIT, REITs in general and property ETFs.

We finish by covering the pros and cons of this kind of property fund.

Why invest in a REIT anyway?

At the time of writing, the average price of a house in the UK according to the UK House Price Index is just over £225,000.

Even if you can get an 80% loan to value mortgage you still need to find £45,000 for your deposit. Then there’s solicitor fees, agent fees, broker fees, and stamp duty, which are likely to total well over £10,000.

You aren’t going to have much change left from £60,000, but what if you don’t have that kind of money?

And even if you do have that kind of money, there are other reasons why you might not want to buy a property. Maybe you don’t want all the trouble that goes with buying and selling or letting out a property.

Perhaps you are not comfortable taking on large levels of debt through a mortgage. It’s not beyond reason that you don’t feel comfortable putting all your eggs in one basket either.

Another way to invest in property

Whatever the reason, there is another way. You can buy property funds or Real Estate Investment Trusts (REITs) like British Land REIT that trade on the stock market.

Right now a single share of British Land REIT is selling for about £6 i.e. a lot less than the average house. In other words anybody with a brokerage account can invest in property for £6! (You can see the current British land share price here).

Rather than putting all your eggs in one basket with a single buy to let, shares in REITs like British Land REIT enable you to diversify you investments over a range of properties.

What is a REIT and how can I invest in them?

REITs are real estate companies that hold all kinds of rent producing property. This could include warehouses, offices, shopping centers, apartments, hospitals and hotels.

You can buy REITs directly from a stock exchange. You can also buy Exchange Traded Funds (ETFs) that contain REITs.

Here are 6 reasons to add them to your portfolio

• They pay a minimum of 90% percent of their taxable income in the form of shareholder dividends each year. As a result the dividend is historically higher than what you get with stocks.
• It is easy to diversify across multiple properties and property types. As mentioned above, investing in a single buy to let would be putting all your eggs in one basket. Investing in a REIT will give you exposure to a collection of different kinds of properties.
• You can gain exposure to the commercial real estate sector rather than the residential sector. Investors often have exposure to the residential market through their home, but the commercial real estate sector is different. Generally, the more asset classes you have, the more diversified you will be and the more diversified you are the safer your investments.
• REITs are liquid, which means easy to buy and sell. Whereas property transactions can often take months to complete, you can buy or sell a REIT in minutes.
• You can invest as much or as little as you like. You can invest in a REIT for under a tenner!
• REITs have a professional management team that know exactly what they are doing. When you invest in a REIT you get a team of experts looking after your properties for you.
• Investment experts advocate adding REITs to you portfolio. Esteemed gurus of finance like Yale’s CEO David Swensen, British economist John Kay, and US economist Burton Malkiel all recommend adding REITs to your portfolio.

In a nutshell

Real Estate Investment Trusts are companies that pool investors money together to buy income-producing real estate.

Investors can then invest in properties that they wouldn’t be able to afford on their own.

They are like mutual funds (OEICs/Unit Trusts) but rather than investing in companies they invest in properties.

Discount

An important characteristic of REITs is that they can trade at a discount or premium to the value of the actual assets they hold.

As an example, let’s assume that REIT A contains a single apartment and it is split into 100 shares. That apartment is worth £100,000, so it figures that REIT A’s shares should also be worth £100,000 in total too. If there were 100 investors in REIT A, the shares should be worth £1,000 each.

But it doesn’t work quite like that. Instead the REIT share price can be completely different to the underlying asset price.

It is common for shares of REITs to trade at double digit discounts or premiums to the value of the underlying property. So, back to our example above, I wouldn’t be surprised to see shares selling anywhere between £800 and £1,200.

The underlying value of a REIT is described by its net asset value (NAV), so if our shares are trading at £800, they are trading at a discount to NAV.

Reasons for trading at discounts or premiums to NAV tend to follow the REIT’s performance and future expectations. However, there are many reasons why a REIT could be over or undervalued.

Increased investment returns

Sharp eyed readers may already be seeing the potential for increased returns by purchasing REIT shares at a discount and they’d be right. It is possible to use this method to increase returns.

You buy at a big discount to NAV and wait for the price level to move up closer to NAV.

Of course, it is not beyond the realms of possibility that the price level could move the other way and you could in fact loose money.

Hence, the very fact that these shares can trade at a premium or discount means they are often considered risker than some other types of investment.

Different types

From an investors point of view, you can split UK REITs into two groups. Those akin to investment funds and those akin to companies.

The key difference being costs.

Generally, the ones that are run like funds have a fund manager and an ongoing charges figure. The ones that are run like a company don’t.

As an example British Land REIT has no ongoing charges, but according to the Association of Investment Companies (AIC) Regional REIT charges 4.23% ongoing charges, but 5.88% when a performance fee is taken into account.

Regional REIT is going to have to outperform British Land REIT by 5.88% just to break even with it.

The AIC lists about 40 funds focused on Real Estate with ongoing charges ranging from 0.88% to 12.89%. The average seems to be around 2%.

On top of ongoing charges on some REITs you also need to pay 0.5% stamp duty at purchase when you buy REITs.

Property

You can also invest in REITs via exchange traded funds (ETFs).

ETFs are funds that can be bought and sold on the stock exchange.

Investors can put their money to work through ETFs that focus on property. These property ETFs usually contain a basket of REITs or other kinds of property company.

A popular ETF in the UK is iShares UK Property UCITS ETF (IUKP), which incidentally has British Land REIT as its third largest holding.

IUKP follows the FTSE EPRA/NAREIT UK Index for example.

Fees

Because ETFs are passive they tend to be much cheaper than REITs that operate like investment funds. IUKP has ongoing charges of 0.4%.

That said, REITs that operate like companies such as British Land don’t have ongoing charges figures at all. What stops them being cheaper than ETFs is the fact that you have to pay 0.5% stamp duty at purchase. That said over time they could still prove cheaper.

For example, say you invest £10,000 in British Land. You pay 0.5% stamp, so that’s £50. Then over a 10 year period your money grows to £20,000, but it doesn’t affect you. You’ve still only spent £50, because the stamp duty is taken at purchase.

On the other hand with an ETF your charges are ongoing. Say you pay 0.4% ongoing charges, this 0.4% is applied to your current balance. On £20,000 that would be £80.

The bottom line is, ETFs and REITs that operate like companies tend to be cheap investments, whereas REITs that operate like investment funds with high ongoing charges figures are not.

It would only be wise to invest in REITs with high ongoing charges if you were confident that they would outperform the wider market.

However, that is notoriously difficult to do (you can read more about it here). Therefore, most investors would be better off with an ETF or REIT without ongoing charges like British Land REIT.

British Land

British Land Company plc (BLND) is one of the UK’s biggest property companies. It has been going for over a century. It was founded in 1856, by National Freehold Land Society which later became known as Abbey National.

Though it only became a REIT in 2007, it has been listed on the London Stock Exchange since 2007 and is a component of the FTSE 100.

Why you might choose to invest in British Land

We’ve established that British Land is a cheaper way to invest in commercial property. We’ve also established that there are many reasons to add real estate to your investment portfolio.

But why choose British Land in particular?

First, this is a big company that holds lots of different kinds of properties. When you buy into the British Land REIT you are diversifying your money over a range of properties and property types.

Rental Yield

British Land REIT has £16.8bn of assets under management, which generate £555m in rent.

Because it is classed as a Real Estate Investment Trust (REIT) it is obliged to return 90% of its rental profits to investors. This is done through dividends which right now yield 5% for British Land.

British Land REIT has a long list of blue chip clients. On average these clients are on 6.9 year leases, so that dividend probably isn’t going down anytime soon.

Right now the shares are selling at a 37% discount to net asset value (NAV). On paper, you are getting a £1 for every 63p that you spend.

The £6 share price is way off its highs of £14 prior to the financial meltdown in 2008.

You are buying on sale and getting paid to wait through a high dividend while the price recovers.

Why you might choose to invest in an ETF instead

Though large, the current discount to NAV is no guarantee that there won’t be further share price declines.

And though British Land invests in lots of different properties, it is still focused in London. On top of that it’s a 50/50 split between retail and office space. Neither of which have rosy looking futures right now.

Brexit

It isn’t beyond the realms of possibility that Brexit could mean companies moving out of their London offices and relocating to Europe.

And retail is getting hammered all over the country! Not a day goes by when we don’t hear about one high street name running in to big trouble. Don’t forget, it is these guys that are paying the rent!

Because of these reasons most investors might be better off choosing to invest through an ETF that passively tracks an index.

Moving away from an index has the potential to increase gains, but it also has the potential to increase losses.

Unless you really know what you are doing or are willing to speculate it probably isn’t worth it.

Why take an active bet when you don’t need to?

How much should you invest?

No matter whether you choose to invest in an ETF, British Land REIT or another REIT you have a decision to make.

What percentage of your portfolio should be allocated to real estate?

Both John Kay (in The Long and Short of It) and David Swensen (in Unconventional Success) allocate 10% in their model investment portfolios. Burton Malkiel (in a Random Walk down Wall Street) starts with 10% but argues you should increase your allocation as you age to take advantage of the income REITs provide.

In your mid fifties you increase your allocation to 12.5% and then further still to 15% in your late sixties and beyond.

Though REITs do have some characteristics that make them a little bond-like in nature, they tend to be more like stocks. Therefore they sit on the stock side of your portfolio. Consequently, a traditional 60/40 split between stocks and bonds could be replaced by a 50/10/40 split between stocks, REITs and bonds.

The bottom line

If you agree with trusted experts like John Kay, David Swensen and Burton Malkiel, you may want to add some real estate exposure to your portfolio.

According to them 10-15% of your portfolio should be allocated to Real Estate.

For most investors an ETF would be a good choice to provide this real estate exposure.

However, if you are willing to do a bit of research or are willing to take an active bet an individual REIT might prove a better investment.

Currently, UK REITs such as British Land appear to be on sale.

But as with anytime for sale signs go up, there are reasons why, so do your due diligence before making an investment.