In this first of two articles exploring UK REITS, Matthew Norris, manager of the TM Gravis UK Listed Property Fund, takes us back to basics, exploring what a REIT is and how it produces returns.
It’s almost two decades since the UK introduced Real Estate Investment Trusts (REITs) in 2007. Since then, the UK property market has faced a number of ups and downs and, with liquidity issues forcing open-ended direct property funds to gate on multiple occasions, UK listed real estate has moved from being a niche allocation for specialist investors to the core property component of many diversified portfolios.
Their appeal is easy to understand: they provide investors with access to professionally managed portfolios of commercial property, daily liquidity and an income stream underpinned by contractual rental payments.
In recent years, however, investor attention has often been drawn elsewhere. Artificial Intelligence, US technology stocks and other high-growth sectors have dominated market headlines, while UK REITs have largely been overlooked despite continuing to generate resilient rental income and attractive dividend yields.
At the same time, UK REIT share prices have traded at some of the widest discounts to net asset value (NAV) seen in recent history, prompting significant M&A activity from private equity and institutional investors seeking to acquire high-quality assets at attractive valuations.
This disconnect raises an important question: if institutional investors are increasingly willing to buy UK real estate assets at today’s prices, should client portfolios be paying more attention?
The question is particularly relevant in light of the FCA’s Thematic Review of Retirement Income (TR24/1), which highlighted concerns around retirement portfolio construction.
The regulator noted that many portfolios remain largely unchanged as clients move from accumulation into decumulation, despite the need for reliable and sustainable income that may need to last 20 years or more.
Against this backdrop, it may be time to revisit the role that UK REITs can play within modern portfolios. While capital values inevitably fluctuate with market sentiment and interest rate expectations, the long-term investment case for real estate has always been built on something much more tangible: the ability of quality assets to generate growing rental income through economic cycles.
Before considering the role REITs can play in retirement portfolios and multi-asset strategies, it is worth returning to a simple question: what exactly is a REIT, and where do returns come from?
What is a REIT and how are returns generated?
At its simplest, a REIT is a listed company that owns income-producing real estate and distributes at least 90% of its property rental income annually (as Property Income Distributions, PIDs). UK REITs were established with very clear objectives in mind – to widen access to commercial property investment, improve liquidity, and eliminate the tax inefficiencies associated with collective property ownership.
They are also exempt from corporation tax on profits made from rental income and from capital gains deriving from their UK property rental business. Funds of REITs structured as a Property Authorised Investment Fund (PAIF) also have the added bonus of paying out PIDs gross to tax-exempt investors (e.g. those holding the fund in an ISA or a SIPP).
UK REITs’ requirement to distribute so much of their income makes them one of the few asset classes where investors receive a direct share of contractual income generated by underlying assets.
Unlike many equities, where returns are heavily dependent on future growth expectations, REIT returns are driven by a combination of:
- Contractual rental income from commercial property assets
- Rental growth over time
- Changes in property values
- Corporate activity such as mergers and acquisitions
Importantly, income is not simply a by-product of REIT ownership. It is the foundation of long-term returns.
Over long periods, it’s the income element that has consistently accounted for the majority of REIT total returns.
Historical data from MSCI/IPD indices show that, over multi‑decade time horizons, income has typically contributed around 60–70% of total returns, with capital growth making up the balance.
While the precise split varies depending on the market cycle, the underlying pattern is remarkably stable.
The IPF Autumn 2025 UK Consensus Forecasts provide a useful reference point. Despite a downgrade to near‑term capital growth assumptions, it forecasts total return for UK commercial property at close to 7.8% per annum over the five years to 2029.
More than half of that return (around 4.9% per annum) comes from income.
While market sentiment can cause share prices to fluctuate significantly in the short term, rental income tends to be far more stable and predictable.
The underlying GP surgery, logistics warehouse, student accommodation block or self-storage facility continues to collect rent.
No information contained in this article should be construed as providing financial, investment or other professional advice and should not be considered as a recommendation, invitation, or inducement to subscribe for, dispose of or purchase any such securities. Professional investors only. Capital at risk. Past performance is not a guide to future performance.
The second of two articles looking at REITs, will be available on the Technical Zone from 13th August 2026.
Main image: commercial property, kyrillos-samaan-dp0qfTP6xbc-unsplash
