The tax bargain
A REIT is exempt from corporation tax on its qualifying property rental business, on condition that it distributes at least 90% of that income to shareholders. The tax is collected from investors instead of from the company, removing the double taxation that would otherwise apply to holding property through a company.
The UK regime launched in 2007 and most large listed property companies converted immediately.
Property Income Distributions
Most of a REIT's dividend is paid as a Property Income Distribution, which is taxed as rental income rather than as a dividend and is paid with 20% withheld at source. It does not benefit from the dividend allowance.
Inside an ISA or SIPP, PIDs are received gross or reclaimable, which makes the wrapper materially more valuable for REITs than for ordinary shares. This is a genuinely useful piece of UK tax detail that many investors miss.
Discounts and what they tell you
REITs trade on the stock market and therefore reprice every second, while their underlying property is valued by surveyors a few times a year. When the two disagree, the REIT trades at a discount or premium to net asset value.
Large sustained discounts are usually the market saying that the surveyors' valuations have not caught up. Through the 2022–23 rate rise, UK REITs traded at discounts of 30–50% months before the valuation data reflected it. Buying at a discount is not automatically cheap; it is sometimes the market being right early.
Specialisation
The sector has fragmented into specialists — logistics, self-storage, healthcare, student accommodation, primary care surgeries, data centres. These behave quite differently from each other and from generalist landlords. Buying "property" via a REIT means choosing a sector and a management team, not buying an index of buildings.
How you would actually trade it
Bought like any share, ideally inside an ISA or SIPP for the PID treatment. Key metrics to compare: EPRA net tangible assets per share against the share price, the loan-to-value ratio, the weighted average unexpired lease term, and the proportion of debt that is fixed and when it matures.
Debt maturity is the thing to check first in a high-rate environment. A REIT with cheap debt expiring next year is a different proposition from one that fixed for a decade in 2021.
What goes wrong
- Equity volatility on a property asset. REITs fall with the stock market even when rents are unaffected.
- Gearing. Most use debt; falling valuations raise loan-to-value and can breach covenants.
- Rate sensitivity through both financing cost and valuation yield.
- Dividend cuts. The 90% distribution requirement applies to profits, and profits can fall.
- PID tax treatment is worse than dividend treatment outside a wrapper.
This entry describes how a market works. It is not a recommendation, a price forecast, or advice about whether this belongs anywhere near your money. How entries are written.