Land Securities – Should you invest in a REIT like this?
This article takes a look at Land Securities, REITs and property investment funds in general and then ways up the pros of cons of these types of investment product.
Be warned, it repeats a lot of the material from a similar article on British Land, so if you’ve read that one, you can skip to the section dedicated to Land Securities here.
Why invest in REITs anyway?
At the time of writing, the average price of a house in the UK according to 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, not to mention 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 or it’s not beyond reason that you don’t feel comfortable putting all your eggs in one basket.
In fact, as an expat there’s a good chance you simply can’t get a mortgage. Not a good one anyway!
Whatever the reason, there is another way. You can buy property funds or Real Estate Investment Trusts (REITs) that trade on the stock market.
Right now a single share of Land Securities for example, is selling for about £9 i.e. 6666 times less than you would need for the average house!
Rather than putting all your eggs in one basket with say a single buy to let, shares in REITs like Land Securities 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, such as 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 REITs to your portfolio
- They pay a minimum of 90% percent of their taxable income in the form of shareholder dividends each year, so the dividend is historically higher than what you get with stocks.
- They let you easily 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.
- They allow you to 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.
REITs
REITs 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.
An important characteristic of REITs is that they can trade at a discount or premium to the value of the actual assets they have.
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 really 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 REITs performance and future expectations, but there are many reasons why a REIT could be over or undervalued.
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 riskier than some other types of investment.
Different types of REIT
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 Land Securities has no ongoing charges, but according to the Association of Investment Companies (AIC) Regional REIT charges 4.23%, but 5.88% when a performance fee (%) is taken into account.
Regional REIT is going to have to outperform Land Securities 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 ETFs
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 Land Securities as its second largest holding.
The key difference between ETFs and investment trusts as far as investors are concerned is that ETFs tend to be passive funds that follow indices like the FTSE 100, S&P 500 or FTSE All World. 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% for example.
That said, REITs that operate like companies such as Land Securities don’t have ongoing charges figures at all. The only thing that stops them being cheaper than an ETFs is the fact that you have to pay 0.5% stamp duty at purchase, but over time they could still prove cheaper.
For example, say you invest £10,000 in Land Securities. You pay 0.5% stamp duty, 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, as that is notoriously difficult to do (you can read more about it here), most investors would be better off with an ETF or a REIT without ongoing charges like Land Securities.
Land Securities
Land Securities plc (LAND) is the largest listed real estate company in the UK by market capitalization. It has been going for over 70 years.
It started in 1944, when founder, Harold Samuel bought Land Securities Investment Trust Limited. At that time it held just three houses in Kensington and some government stock.
It became a REIT in 2007 and is a component of the FTSE 100.
Why you might choose to invest in Land Securities?
We’ve established that Land Securities is a cheaper way to invest in commercial property and that there are many reasons to add real estate to your investment portfolio, but why choose Land Securities in particular?
This is a big company that holds lots of different kinds of properties. When you buy Land Securities you are diversifying your money over a range of properties and property types.
It has a combined portfolio of £14.1 billion, which generate £406 million in revenue.
Because it is classed as a REIT it is obliged to return 90% of its rental profits to investors through dividends which currently yield 5.3%.
The company has a long list of blue chip clients on average 7.8 year leases, so that dividend probably isn’t going down anytime soon.
Right now the shares are selling at a 36% discount to net asset value (NAV). On paper, you are getting a £1 for every 64p that you spend.
The £9 share price is way off its highs of £24 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 of Land Securities
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 heavily focused in London and Retail. Neither of which have rosy looking futures right now.
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, and 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 in REITs?
No matter whether you choose to invest in an ETF, Land Securities 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, so 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 Land Securities 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.
