UK Property Funds Shift Towards REITs: What’s Driving the Trend?
- Nihinlolawa 'Lola' Sanni
- Feb 19
- 3 min read
The UK property investment landscape has been undergoing a significant transformation. Traditional open-ended property funds, which have historically invested directly in physical properties, are now pivoting towards Real Estate Investment Trusts (REITs). This shift reflects a strategic response to regulatory changes, liquidity challenges, and evolving investor preferences. Let’s delve into why property funds are leaning into REITs and what this means for investors.
The Liquidity Conundrum
One of the core challenges with traditional property funds has been liquidity. Open-ended funds, which allow investors to buy and sell shares on demand, have struggled to balance this flexibility with the illiquid nature of physical property investments. High-profile suspensions, like those seen during the Brexit referendum and the COVID-19 pandemic, exposed these vulnerabilities.
According to the Financial Conduct Authority (FCA), property funds faced significant redemption pressures during market downturns, leading to gated funds and frozen withdrawals. In response, the FCA introduced new rules in 2023 mandating notice periods of up to 180 days for withdrawals from open-ended property funds. This policy aims to provide fund managers with sufficient time to sell assets without distress but has also reduced the appeal of these funds to liquidity-seeking investors (FCA).
The REIT Advantage
REITs offer a more liquid alternative. Traded on stock exchanges, REITs provide daily liquidity without the operational complexities of physical asset sales. They also come with tax advantages — REITs are exempt from corporation tax on property rental income, provided they distribute at least 90% of their taxable income to shareholders.
Funds like the L&G UK Property Fund and Aberdeen Standard UK Property Fund have increasingly allocated larger portions of their portfolios to listed REITs. This shift has not only enhanced liquidity but also diversified risk profiles by broadening exposure across property sectors.
Performance and Market Trends
Data from the Investment Association (IA) shows that property funds with higher REIT allocations have outperformed traditional brick-and-mortar funds over the past 12 months. The IA UK Direct Property Sector saw an average return of -4.5% in 2024, while funds with blended REIT strategies reported modest positive returns of around 2.3%.
This divergence underscores the challenges facing direct property investments, including falling commercial property valuations and increased operational costs. In contrast, REITs, particularly those focused on logistics and residential sectors, have benefitted from structural tailwinds like e-commerce growth and housing demand.
Regulatory Support and Industry Shifts
The UK government has also played a role in promoting REITs. Recent policy changes have simplified REIT structures, reducing administrative burdens and encouraging broader market participation. Additionally, the FCA has expressed support for fund structures that enhance investor protection and liquidity, indirectly favoring REIT-oriented strategies.
High-profile fund restructures reflect this trend. The M&G Property Portfolio, which faced a year-long suspension in 2019, announced plans in 2025 to transition up to 40% of its assets into listed REITs, citing improved liquidity management and diversification benefits.
What This Means for Investors
For investors, the shift towards REITs offers several advantages:
Enhanced Liquidity: Easier entry and exit without the risk of fund suspensions.
Diversification: Exposure to a wider range of property sectors and geographic markets.
Income Stability: REITs often provide attractive, stable dividend yields.
However, there are trade-offs. REITs are subject to stock market volatility, which can introduce higher short-term price fluctuations compared to physical property valuations.
Conclusion
The migration of UK property funds towards REITs marks a pivotal shift in the real estate investment landscape. Driven by regulatory pressures, liquidity challenges, and market dynamics, this evolution offers investors a more flexible and diversified way to access property markets.
As the industry adapts, staying informed about fund strategies and underlying asset compositions will be crucial. Whether you’re a long-term income seeker or a growth-oriented investor, understanding the role of REITs in modern property funds can help you navigate this changing terrain.
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