By Jake Moeller, associate director – responsible investing at Square Mile Research
For UK investors, the legacy of commercial property funds is thickly tarnished. The wave of closures, gated redemptions and liquidity issues that plagued these vehicles caused difficulties for portfolios and undermined confidence in property as an asset class generally.
Today, there is a potential for investors to rediscover property in the form of funds investing in real estate investment trusts (Reits). Reits-focused funds offer a more liquid and transparent route into property investment and assuage some of the drawbacks of their direct cousins.
The downfall of UK direct property funds came from their liquidity mismatch. These funds held physical assets – offices, retail parks, industrial units etc, but offered daily liquidity to investors. When market stress hit, such as during the Brexit vote or the pandemic, redemptions surged and some high-profile retail funds were forced to suspend trading. This eroded trust and prompted regulators to question the long-term viability of these vehicles.
Reits overcome this. They are publicly traded on stock exchanges, meaning they are as liquid as equities. When you invest in a fund that holds a portfolio of Reits, you are not locked into illiquid assets. You can buy or sell your holdings quickly, without waiting for the underlying property to be sold. This makes Reits funds more resilient and adaptable in times of market stress.
Prioritising income
One of the main appeals of Reits is their income generation. Like equities, Reits can provide capital growth, but unlike many equities, they are legally required to pay out the majority of their rental income to shareholders as dividends. This makes them a reliable and durable source of income. Traditional equities often generate returns through a mix of dividends and reinvested earnings (or, for growth stocks, pure capital appreciation).
Reits prioritise income and investors get exposure to rent-backed cashflows – a very different source of return than the profit cycles of companies. This can be especially attractive for income-focused investors looking to diversify their income streams beyond bonds and traditional dividend-paying equities.
In the shorter-term, Reits exhibit equity-like behaviour and are sensitive to interest rate movements and broader market sentiment, especially over shorter timeframes. This was especially evident after the former UK prime minister Liz Truss’s mini-budget in September 2022. For that month, the IA Property Other classification returned -10.4% versus the IA Global sector, which returned -5.5%. Reits will tend to underperform when interest rates rise sharply, as higher yields on government bonds make their dividend payouts relatively less attractive.
However, over longer holding periods these correlations to equities reduce. The underlying drivers of Reits returns (rental growth, asset management, portfolio diversification) become increasingly material. Reits therefore provide diversification benefits to traditional equity and bond portfolios over the medium to long term.
ESG objectives
Another advantage of Reits investing comes from their increasing focus on sustainability. Many Reits now benchmark themselves against Global Real Estate Sustainability Benchmark (GRESB) standards, which assess the ESG performance of real estate portfolios. Investors can therefore evaluate the carbon intensity of a Reits portfolio, its energy efficiency and its climate risk resilience.
This level of transparency is a significant step up from the more opaque world of the old commercial property funds. Reits investing is aligned with broader ESG objectives that many investors are prioritising.
With buildings accounting for a large portion of global carbon emissions, investing in Reits that actively manage and improve the sustainability of their assets can be a direct way to support the net-zero transition.
Another compelling reason for investors to consider Reits is private equity. If private equity is the ‘smart money’, it has shown considerable interest in Reits. Unloved by retail investors, many Reits have been trading at a considerable discount to net asset value and have been snapped up by private equity investors who recognise the bargains that are on offer.
Reits offer investors steady cashflow, inflation hedging and long-term capital appreciation all without the baggage of illiquidity. While they do come with equity-market sensitivity in the short-term, this can be a manageable trade-off when you consider the broader benefits and maintain a longer-term investment horizon.
Reits allow investors seeking the structural strengths of property to buff away its tarnish and let the underlying value shine through.
Funds to watch: Square Mile picks
Rather than cherry-picking individual Reits, UK investors can access funds that invest in a diversified portfolio across sectors and geographies. Square Mile currently rates three vehicles:
The Legal & General Global Real Estate Dividend Index fund provides broad exposure to developed market large-cap Reits with a dividend focus. Tracking the FTSE EPRA Nareit Developed Dividend Plus index, it offers low-cost, passive access to more than 300 income-producing real estate companies. It has a yield of 3.1% (as of 31 March 2025).
The TR Property Investment Trust is a long-standing actively managed trust with a pan-European focus. This strategy blends listed property equities and a small amount of direct UK property. It has demonstrated a robust track record and is positioned in sub-sectors such as European shopping centres and London flexible offices. It benefits from the expertise of a highly experienced manager, Marcus Phayre-Rudge, and reports a yield of 4.9% (as at 20 May 2025).
Schroder Global Cities Real Estate is an SDR-labelled fund (Sustainability Focus) that invests in global Reits with strong ESG credentials and has exposure to urbanisation and digital economy themes. With two highly experienced fund managers at the helm, Tom Walker and Hugo Machin, it yields 3.6% (as at 30 April 25).
Each of these strategies are different with exposures ranging from global growth in logistics real estate, stable income from healthcare and residential Reits, to carbon-conscious portfolios that are actively decarbonising their asset bases. All are underpinned by a common characteristic – holdings that generate rental income, which is distributed to shareholders.
This article originally appeared in the June issue of Portfolio Adviser magazine