Best UK REIT ETF

This week, we take a look at all the UK REIT ETFs on the market.

Spoiler alter: There aren’t many of them. Making your choice shouldn’t be that difficult. It will come down to this:

Do you want new and exotic or tried and tested? Are you happy with complicated or would you like to invest commission free?

Here’s a quick summary but read on below for more details.

UK REIT ETF	Benchmark	Designed to	Advantages	Disadvantages
IUKP	FTSE EPRA/NAREIT	Track the performance of real estate companies and REITs listed on the London Stock Exchange.	Much bigger fund with longer track record. Less complicated. Can invest commission free.	In theory behaves less like real property. More volatile.
UKRE	MSCI UK IMI Liquid Real Estate Index	Achieve a risk/return profile similar to direct real estate indexes using liquid instruments.	In theory behaves more like real property. Adds inflation protection. Less volatile.	Smaller fund with shorter track record. More complicated. Can’t invest commission free right now.

What is a REIT?

REIT stands for Real Estate Investment Trust. Real Estate Investment Trusts (REITs) are designed to enable investors to pool their money in portfolios of income generating property.

In other words, REITs let you invest in commercial and residential property. When you buy a share of a REIT you get access to small slices of a basket of properties. You also get a proportional interest in all the income that these properties generate.

Think about it like this. You get access to the property market without having to buy property. You can invest in UK real estate, invest in US real estate or invest in global real estate without the hassle of the real buying process.

Two of the best REITs UK investors like are Land Securities and British Land. The second of those is a bit more well known. I think that’s because British Land dividends are usually quite high so because this company is pretty big, many people see it as one of the best UK REITs for income.

UK REITs aren’t just commercially focused, though. You can buy shares in residential options.

For example, with the current residential house price increase in the UK a popular UK residential REIT is Grainger PLC (GRI.L). In theory, investing in Grainger lets you take part in a buoyant property market without the hassle of buying real property.

Whether commercial or residential, REIT investing makes sense for a few key reasons:

Reasons to invest

• Income – 90% of a REIT’s taxable income is paid out annually via dividends. This means REITs usually pay out more than other types of companies.
• Diversification – REITs hold all kinds of property. There are warehouse REITs, shopping centre REITs, hospital REITs, hotel REITs, residential property REITs, office REITs and REITs that contain a mix of everything. As a result, you can get exposure to an entire portfolio of different properties. This avoids having all your eggs in one basket.
• Liquidity – Buying and selling REITs takes minutes or even seconds, whereas buying and selling houses takes months.
• Investment Size – You can invest in REITs for under a tenner!
• Professional Team – REITs are run by teams of experienced professionals. In most cases, they’ll be able to get better deals when buying property, and generate more money from the properties they hold than you would ever be able to.
• Portfolio Volatility – Because REIT share prices often rise and fall out of sink with stocks and bonds, they can help offset losses in your other investment holdings.

For all those reasons UK listed REITs are popular with investors right now. If you are interested there is a comprehensive list of list of UK REITs here.

But what about exchange traded funds (ETFs)?

What is a REIT ETF?

A REIT ETF is an exchange traded fund that holds multiple REITs and property company shares. This takes your diversification to another level. It means you have exposure to even more properties than you would do with an individual REIT.

Typically individual REITs will focus on one or two types of property, whereas REIT ETFs can contain just about everything.

In other words REIT ETFs have all the advantages of REITs with additional diversification. And importantly, the more diversified your investments are, the less risky they are likely to be.

There are advantages with individual REITs of course.

First, if you wanted to play the market and bet on a particular type of property outperforming other property types, that would be easier to do with an individual REIT.

And second, REIT ETFs come with ongoing charges which could subtract from your overall returns. Some individual REITs (not all) don’t have these charges.

REIT ETFs are still going to be the better option for most investors that want property exposure, though.

UK options

Unlike the US, the UK doesn’t have many REIT ETFs. In fact, the best one for you will come from a group of two. And though ideally, I’d make a comparison between different providers, in this case that’s not possible either, as they both come from iShares.

Here are your options:

• iShares UK Property ETF (IUKP), has the FTSE EPRA/NAREIT
• iShares MSCI Target UK Real Estate ETF (UKRE)

Both have ongoing charges of 0.4%. This means they are pretty low cost and on the face of it, there’s no cost advantage with either fund.

Where they differ is in the benchmark they are measured against. Now, benchmarks and index types isn’t the most interesting topic so I’ll try to give you the main points as quickly as I can.

iShares UK Property ETF (IUKP)

iShares UK Property ETF (IUKP), has the FTSE EPRA/NAREIT United Kingdom Index as its benchmark. This is designed to track the performance of real estate companies and REITs listed on the London Stock Exchange. It does this by holding shares in those companies.

iShares MSCI Target UK Real Estate ETF (UKRE)

iShares MSCI Target UK Real Estate ETF (UKRE), has the MSCI UK IMI Liquid Real Estate Index as its benchmark. This is designed to achieve a risk/return profile similar to direct real estate indexes using liquid instruments.

If you didn’t fall asleep through that little explanation you would be forgiven for thinking UKRE sounds a bit more complicated than IUKP.

Spoiler alert. It is!

Those fixed income securities i.e. UK Government inflation-linked bonds are included in the fund to remove leverage. The intention being to achieve a risk/return profile closer to direct real estate, whilst at the same time, add inflation protection. At the time of writing over 30% of the fund is made up of bonds.

That’s pretty important, because I’m sure it goes without saying that bonds aren’t real estate. They are essentially loans to the UK government that receive interest payments.

There’s also some additional jiggery pokery to reduce index volatility and equity beta. We don’t really need to know what this means. We just need to know that it involves reweighting and applying a Volatility Tilt methodology. And in turn that as a result, volatility and leverage should be lowered with UKRE.

Volatility meaning price fluctuations and leverage meaning borrowed money.

Which is the best?

On the face of it, UKRE definitely sounds like a better proposition. But then again, this is a new fund and without a track record it is hard to see how it really compares to the tried and tested IUKP.

Looking back over recent performance UKRE has definitely been less volatile this year. It only dropped 15% compared to 25% for IUKP (pretty much anything that wasn’t big tech took hit this year!).

So I guess UKRE is doing what it is supposed to do. That said, one years past performance could be luck as much as anything else. Not to mention the fact that volatility goes both ways. Yes UKRE may go down less than IUKP when the market drops, but if that is the case, in all likelihood it will probably go up less than IUKP when the market rises.

Why size matters

The funds’ sizes are also worth noting. UKRE has net assets of GBP 80,147,429 whereas IUKP has net assets of GBP 687,138,666, which makes IUKP about 9 times bigger than UKRE and that matters.

Bigger funds tend to be more liquid and the associated costs of share trading are usually lower with large, easily tradeable ETFs than with smaller more illiquid ones.

As for removing leverage and adding inflation protection, although those sound like good ideas, I’m not sure they are going to help your returns. Leverage or borrowing lots of money can be dangerous when things go bad, but in the good times leverage should juice returns. And I may be wrong, but I’m pretty sure stocks and property both protect against inflation anyway.

It’s also worth noting that in finance complexity often adds costs and costs get removed from returns.

And a final point worth mentioning is the fact that I can’t find a place to buy UKRE commission free, where as I found IUKP at eToro. The cheapest place I can find UKRE is on DEGIRO. They charge € 2.00 (approx £1.72) commissions on trackers/ETFs.

At the time of writing the IUKP share price is £6.65, but by the time you are reading this is may have changed. You can check it here. And the current UKRE share price is £5.63. You can check this one here.

IUKP vs UKRE Summary Table

UK REIT ETF	Benchmark	Designed to	Advantages	Disadvantages
IUKP	FTSE EPRA/NAREIT	Track the performance of real estate companies and REITs listed on the London Stock Exchange.	Much bigger fund with longer track record. Less complicated. Can invest commission free.	In theory behaves less like real property. More volatile.
UKRE	MSCI UK IMI Liquid Real Estate Index	Achieve a risk/return profile similar to direct real estate indexes using liquid instruments.	In theory behaves more like real property. Adds inflation protection. Less volatile.	Smaller fund with shorter track record. More complicated. Can’t invest commission free right now.

Are there any alternatives?

If neither of those meet your needs, you could look at an individual REIT. You get something similar, but on a smaller scale. The big two in the UK are Land Securities and British Land.

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.

British Land

British Land Company plc (BLND) is another 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.

The Bottom Line

The bottom line is both these funds provide good exposure to the UK real estate market. As for which is the best option, I have to admit UKRE sounds better (or at least more advanced) in theory, but I’ll be sticking with IUKP until we’ve got more of a track record to compare (The fact that IUKP is available commission free also helps)!