This ‘Manston View’ takes a step sideways from “bricks and mortar” and looks instead at the wrapper that increasingly sits around them: the UK Real Estate Investment Trust (REIT).

For many investors, REITs sit in an awkward middle ground. They are at once familiar – a tradeable, liquid share; a regular dividend – and unfamiliar, being governed by a specific tax regime and a different set of rules to ordinary property companies – never mind being ostensibly valued by the market in a manner somewhat different to many investment opportunities, and sometimes quite counter-intuitively. Meanwhile the regime itself has evolved since inception: rule changes and updated HMRC guidance have broadened who can use it, and how.

In the following two pieces we seek to set out:

1. What the UK REIT regime actually is (and is not).
2. How the universe of UK REITs has shifted – from purely listed to a mix of public and “quiet” private vehicles.
3. What has been happening in the listed REIT market – discounts, yields and sentiment.
4. How different REIT sub-sectors behave, and what this might mean for investors.
5. How we think about REITs versus direct mid-market commercial real estate.

This week, we shall look to cover points 1, 2 and 3. In next week’s article, we shall look to disaggregate the UK REIT universe down to its component parts and sectors; and compare it to our experiences of the direct investment market.

As with all Manston Views, this seeks to be descriptive rather than prescriptive. It is not advice – merely an attempt to make sense of a fast-moving part of the UK property investment ecosystem, framed from the vantage point of a mid-market investor who wants exposure to Commercial Real Estate.

1. What actually is a REIT?

At its core, the UK REIT regime is a tax framework – not a product or entity in and of itself. It is a ‘vehicle that allows an investor to obtain broadly similar returns from their investment, as they would have, had they invested directly in property’.

Originally arising in the USA back in the early 1960’s (under the superbly confusing name of the Cigar Excise Tax Extension!), as a method to allow investors access to a diversified, liquid exposure to large-scale Commercial Real Estate. In other asset classes (usually!) – you don’t have to buy the whole thing to get exposure, just a share – so why not CRE?

Under HMRC rules, a UK REIT is a company (or group) that elects into a special regime under which:

• It must invest mainly in property rental activities; and
• It is exempt from corporation tax on the profits and gains of that property rental business (but not any other ‘residual’ streams of income that fall within the business);
• In exchange, it must distribute at least 90% of those tax-measured property rental profits to shareholders, as property income distributions (PIDs). There is no such requirement for the distribution of capital profits (although gains here would fall under the normal regime for corporation tax).

The regime is elective. A company has to notify HMRC that it wishes to become a REIT, and it only benefits from the tax treatment if it meets a series of ongoing conditions – notably “balance of business” tests requiring that the majority of its assets and profits relate to property rental, and certain shareholding, financing and listing/ownership rules.

A few points are worth emphasising:

• The “90% rule” is about tax-measured rental profits, not IFRS profit after everything. It is tested within the ring-fenced property rental business as defined in the tax rules.
• The exemption is only for the ring-fenced property rental business. Development for sale, trading activities or other non-qualifying income streams remain subject to corporation tax in the usual way.
• The regime is now more flexible than it once was. Successive Finance Acts and HM Treasury amendments have relaxed some of the original entry requirements – including aspects of the listing test (no longer need 70% of the REITs shares to be held by institutional investors) and the ability to hold a single property (as long as the value exceeds £20m at the time of acquisition) – to broaden access.

In other words: a REIT is not inherently “better” than a conventional property company. It is a corporatised property vehicle that swaps tax on rental profits for a mandatory, tax-driven distribution discipline. For income-oriented investors, that can be attractive; for those seeking to retain and recycle cash within a vehicle, it can feel more constraining as it can handicap continued investment within the behicle. It is also worth, anecdotally, noting that this scheme (on its face) can incentivise short-termism – as it is not possible to stock-pile cash to invest in capital improvements (although repairs, maintenance are allowable expenses under the PID calculations) unless via the capital sale of assets.

2. From listed gateway to broad regime: how the UK REIT universe has shifted

When the UK REIT regime was first introduced in 2007, the focus was firmly on listed vehicles. The FTSE EPRA/Nareit UK REIT index was created as a subset of a broader UK real estate index to track these new tax-transparent listed property companies. This index (suitably disaggregated!) is one of the nominal benchmarks that Manston uses to measure its own performance.

Over time, two things have changed:

1. Legislative reform. HM Treasury and HMRC have progressively amended the regime – for example, loosening listing requirements and allowing certain single-property REITs (subject to minimum value thresholds and diversification caps). HMRC’s Investment Funds Manual has been updated to reflect these changes, including revised guidance on the conditions and limits applying to REITs.
2. Market adoption. Press coverage, drawing on HMRC Freedom of Information data, has highlighted a marked expansion in the number of UK REITs in recent years, including many that are not publicly listed but nonetheless use the regime to hold institutional property portfolios.

The result is a two-speed REIT universe:

• A public, listed market – the traditional REITs that investors access via the stock exchange and which sit in indices such as the FTSE EPRA Nareit UK.
• A growing population of private, often unlisted REITs – frequently used by institutional or professional capital as tax-efficient holding vehicles and sometimes structured around a single large asset or tightly defined portfolio – although the requirement for 70% institutional holding does remain in place for non-listed REITS.

For a mid-market investor, this duality matters. The listed REITs offer liquidity, daily pricing and volatility; the unlisted ones share more characteristics with traditional property funds or club vehicles, with valuations driven by periodic appraisals, not screens.

3. What has been happening in the listed UK REIT market?

The last cycle has not been an easy one for listed UK REITs.

• The FTSE EPRA Nareit UK Index, which tracks the performance of UK-listed real estate companies and REITs, has been through a period of pronounced drawdown and volatility as higher interest rates, cap-rate moves and changing occupier demand have fed into valuations.
• Industry commentary from the Association of Investment Companies (AIC) notes that the EPRA UK total return index – a common benchmark for listed UK property – delivered a negative total return in 2024, and that many REITs entered 2025 on steep discounts to NAV despite high running yields.
• Taking the REIT Index as a whole – since 2016 (to y/e 2024), an annual return (indeed loss!) of some -0.9% has been generated (total return!), compared to a FTSE All-Share total return average over the same period of some 5.6%.

UK REITs Total Return vs. Property Non-REIT vs. FTSE All-Share

Three themes stand out:

• Discounts and sentiment. Listed REITs trade where equity investors are willing to clear – not where valuers think the underlying bricks are worth. In the recent environment, concerns over debt costs, refinancing risk and asset obsolescence (possibly a direct result of the 90% issuance requirement?) have pulled many REIT share prices below their reported net asset values . Analysis cited by the AIC emphasises that discounts have remained wide even as base rates have started to reduce, suggesting that sentiment has not yet fully normalised. Does this suggest a more structural weakness to the structure itself? At Manston, we believe that it certainly poses questions about the continued attractiveness of this method of entry into the CRE sector for certain types of investors.
• Yield versus risk. In return, investors have been offered relatively high dividend yields at the index level – reflecting both the 90% distribution rule and the impact of discounts. However, these yields are not “bond-like”; they embed assumptions about rental resilience, voids, capex and the ability of REITs to refinance or repay debt in a higher-rate world – so high levels of risk are baked in when seeking to correlate dividends to capital value.
• Dispersion. As with direct property, outcomes have diverged. Logistics-heavy and convenience-retail REITs with strong covenants, long leases and indexation have behaved very differently from, say, central London office or discretionary retail-led vehicles. Company-specific capital structures, hedging, asset quality and management credibility have driven performance at least as much as broad sector labels.

For an investor used to holding individual buildings (or a portfolio thereof), it can be disconcerting to see a high-quality, fully-let REIT trading at a material discount to its last reported NAV. But the listed market is pricing liquidity, equity risk and regime complexity, not simply “bricks and mortar at 65p in the pound”.

In our next edition – we shall seek to disaggregate the various sectors within the REIT landscape to measure performance at a sector & instrument level – and discuss the ‘why’ of performance in a bit more detail.