How do REITs perform (I.e., yield income) relative to land investments?

All real estate in the UK is poised for value growth, given demographic trends for the next two decades at least. But how to invest requires careful examination.

In all sectors of real estate investment in the U.K. there is a general level of optimism about the mid-term future. This is largely based on demographic trends in the country, as charged by the Office for National Statistics (ONS) and the 2011 Census. The numbers basically reflect a population increase based on a higher birth rate, a lower death rate and inward migration.

For example, from 2001 to 2011 the population of England and Wales has seen a net increase from 52 million to 56 million, an astounding 7 percent growth rate. The ONS offers some interesting breakouts of statistics within this growth, which includes how the population is distributed evenly among age groups. In comparison to some western European countries and Japan, the distribution of populations in the 30- to 60-years age categories is evenly split. This means that the golden 45-49 year old cohort – those who buy the most, pay the most in taxes and who purchase properties – will be a strong economic driver at least through the year 2035.

There is also a well-documented housing shortage, which became more critical in the recession during which little building was done. Combined, these factors spell good prospects for real estate valuations and real estate investors.

There are two primary means for investing in real estate. One is through real estate investment trust (REITs) funds, which own a percent of properties across a large and diverse portfolio. The other is the property owner who is engaged with a particular tract of land, developed or undeveloped. Some investors spread themselves between these two types of investments and some steer clear of one while investing entirely with the other. The type of investor who focuses exclusively on REIT funds is different from the strategic land investor in at least three key ways:

• Time frame expectations – A REIT may deliver a good return in a matter of weeks or months, or it can go on for years with flat or even losing returns. The land funds investor generally expects to hold the investment (and achieve target returns) in a two to five year time frame. For the land investor, the property that is selected is ripe for development with a zoning change because well-researched locations will accommodate a municipality’s need to expand commercial or residential properties.

• Need (or non-need) for liquidity – As a REIT is bought and sold on an exchange, that investor has the advantage of doing just that at a time of their choosing. The land investor, operating as an individual or within a professionally managed fund, understands the upswing of value is likely to happen in a few short years and therefore is wise to stay with the investment until the property is sold.

• Relationship with the actual property – While the REIT investor technically owns shares in dozens if not hundreds of properties, he or she may never even know where those holdings exist much less the factors affecting their value. The land investor is well informed on the whereabouts of the property, the local economy and the land zoning board’s propensity to approve a use designation (zoning) change. His or her task is to devise a smart land site assembly that satisfies investors, buyers and neighbours. Arguably, this closer relationship can enable smarter investment decisions and yield stronger capital growth returns.

Of course, no investor should embark on any significant real estate investment of either type without discussing his or her investment strategies holistically with a personal financial consultant.