2 Top UK REITs to Watch in 2023

Roberto Rivero

Real Estate Investment Trusts, or REITs, are publicly traded companies which own and manage portfolios of income generating property on behalf of their shareholders.

Since being introduced to the UK in 2007, there are now over 50 REITs listed on the London Stock Exchange, but which are the top UK REITs to watch in 2023? And why should you consider investing in UK Real Estate Investment Trusts in the first place? Keep reading to find out.

Why Invest in UK Real Estate Investment Trusts?

As already noted, Real Estate Investment Trusts own and manage portfolios of property on behalf of their investors. The types of properties owned by REITs can include office buildings, apartment blocks, shopping malls, hotels or any other property which generates rental income.

REITs allow investors to efficiently enter the property market, gaining access to a variety of rental income streams without needing the high level of capital required to buy this kind of real estate, or the headaches that come with managing them.

UK Real Estate Investment Trusts are exempt from corporation tax on both rental income and any capital gains made from the sale of their UK rental properties. However, this advantageous tax status is not bestowed for nothing.

In exchange for REIT status, UK REITs must meet a number of conditions, one of which is to distribute at least 90% of the profit made from property income each year to their shareholders as dividends. Therefore, UK REITs can be an appealing prospect for income investors, as they often have attractive dividend yields.

Furthermore, REITs offer investors the opportunity to diversify their portfolio into property, without needing to buy the physical asset. A diversified portfolio is an important aspect of risk management and property, in particular, has historically proven to be an effective hedge against inflation.

Top UK REITs to Watch

Now we know what REITs are and why someone would want to invest in them, what are some of the top UK REITs to watch in 2023?

Tritax Big Box REIT

Tritax Big Box REIT owns and leases a portfolio of warehouses to big-name tenants such as Amazon, Morrisons, Tesco and Ocado. As of 30 June 2022, the company owns a total of 70 investment assets with 100% occupancy rate.

In the six months ended 30 June 2022, their contracted annual rent roll rose 10.5%. All of their contracts provide for upward-only rent reviews with more than half of these reviews linked to inflation.

Focussing solely on warehouse space, or big boxes, Tritax Big Box finds itself well-positioned to continue to benefit from future growth in the e-commerce market. However, a recession and the consequential fall in consumption could negatively impact this UK REIT’s future growth.

A further headwind which is facing UK REITs is increasing interest rates. A consequence of having to distribute the majority of profit from property income is that REITs are often compelled to borrow to fund growth. Rising interest rates means that the cost of this borrowing increases, which could negatively affect UK Real Estate Investment Trusts which have a high level of debt maturing in the near future.

Nevertheless, Tritax’s borrowing is relatively low for the industry, with debt at 23.7% Loan to Value (LTV) and an average debt maturity of around 6 years.

Depicted: Admirals MetaTrader 5Tritax Big Box REIT Weekly Chart. Date Range: 24 April 2016 – 25 October 2022. Date Captured: 25 October 2022. Past performance is not a reliable indicator of future results.

Tritax Big Box’s share price has had a difficult time in 2022, falling 45% in the first nine months of the year. This means that the REIT is currently trading at a discount of 45% to its Net Asset Value (NAV) and has a dividend yield of 5.2%, considerably higher than the wider FTSE 250’s 3.4%.

Custodian REIT

Instead of focussing on one type of property like our previous UK REIT, Custodian REIT owns and manages a portfolio spanning a variety of property sectors all across Great Britain.

Custodian’s diversified portfolio includes industrial buildings, retail warehouses, office blocks and high street retail property.

As with all UK REITs, the biggest risk for Custodian currently is the looming prospect of a recession, which would potentially impact rental income for the worse, as well as generally dampen demand in the property market.

However, the diversification of Custodian’s portfolio might help minimise its risk, by not exposing it to any single industry. In the year ending 31 March 2022, Custodian acquired another UK REIT named Drum, which comprised of 10 properties, 79 tenants and a contractual annual rent roll of £3.3m.

In total, Custodian REIT’s total annual contractual rent is £40.5m and its debt was reported at 19.1% LTV in 2022.

Custodian has not suffered as badly as Tritax in the stock market this year, with share price falling just 7% in the first nine months of 2022. Its dividend yield stands at an impressive 8.1% currently.

How to Invest in UK REITs

With an Invest.MT5 account from Admirals, you can buy shares in both UK Real Estate Investment Trusts examined in this article, as well as a number of other REITs from the UK and the US! Follow these steps in order to get started:

  1. Open an Invest.MT5 account and log in
  2. Find your account details and click ‘Invest’ to open the MetaTrader Web Trading platform
  3. Search for the desired UK REIT in the Market Watch and drag the symbol onto the chart
  4. Click ‘New Order’ at the top of the screen, enter the amount of shares you wish to purchase and click ‘Buy’ to send your order to the market!
Depicted: Admirals MetaTrader WebTrader – Tritax Big Box Daily Chart – New Order. Date Range: 17 February 2022 – 25 October 2022. Date Captured: 25 October 2022. Past performance is not a reliable indicator of future results.

Final Thoughts

UK REITs can provide an interesting opportunity for investors to diversify their portfolios in 2023 and earn dividends, which can either be reinvested or withdrawn for additional income.

However, as with many industries, the property market and REITs face considerable headwinds currently. Rising interest rates are increasing the cost of borrowing, making new and existing debt more expensive. This will potentially reduce the profitability of UK REITs whilst making the prospect of borrowing more to fund future growth less appealing.

Furthermore, if the UK economy slips into recession, the outlook for the property market will become more uncertain. Property portfolios could fall in value and rental income may be at risk.

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  • The Analysis is prepared by an independent analyst Roberto Rivero, Freelance Contributor (hereinafter "Author") based on personal estimations.
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