How REITs generate returns
REIT returns come from two sources. Dividend income: the 90% distribution requirement makes REITs high-yield investments — UK and US REIT dividend yields typically range from 3–6%, significantly above broad equity market yields. The dividends reflect rental income from the underlying properties, minus operating costs. Capital appreciation: if property values rise (through rental growth or cap rate compression), the REIT’s net asset value (NAV) rises and the share price should follow. Total returns from REITs have historically been competitive with broad equities over long periods, with lower correlation — making them a genuine diversification tool rather than just a yield play.
REITs vs direct property investment
Direct property investment in the UK typically requires a minimum of £100,000–£250,000 for a deposit, carries stamp duty, requires a mortgage, demands ongoing management (tenants, repairs, voids), and is highly illiquid — selling can take months. A REIT investment can be started with £50, costs a single dealing fee, is managed by professionals, generates income automatically as dividends, and can be sold in seconds during market hours. The trade-off: REITs are correlated with equity markets, particularly in the short term, because they trade on exchanges where liquidity providers and sentiment affect prices independently of underlying property values. Direct property is illiquid but insulated from daily market volatility.
“REITs solved a simple problem: commercial real estate generates excellent returns, but only wealthy individuals and institutions could access it. REITs made it available to anyone with a brokerage account.”
What this means for you
REITs can be held in an ISA or SIPP, making their dividends and capital gains tax-efficient. The UK REIT market includes well-known names like SEGRO (industrial and logistics), Land Securities (office and retail), and Assura (healthcare property). Global REIT ETFs provide exposure to the largest and most liquid REIT markets (US, Japan, Australia, UK, Singapore) in a single low-cost fund. REITs are most appropriate as a long-term income component in a diversified portfolio — not as a short-term trade. Their sensitivity to interest rates means they tend to underperform when rates are rising (as their dividend yields become relatively less attractive) and outperform when rates fall or remain stable.