I first got into reits after a family member who was managing the rent of a house I interited wanted to stop managing the rent for me and I received a lump sum. I thought that reits would be a good replacement because they would pay a similar dividend, and give me UK property exposure, but not currency risk.
Covid upset that and the high interest rates. But overall I’ve done OK. But the property income distributions are taxed at source and I have to claim the tax back, and so I am moving the ones that haven’t been taken over into my tax free account. I am leaving whr as it is as it’s about to be possibly bought out in a cash other. The others I have to decide which to keep as it costs me money to move them. I have:
The plan is to hold around three years as interest rates are likely to rise, and move to more crypto towards the 2028 halving, but also I’ll hopefully be still alive and non-resident then and so can pivot away from Europe generally and have non-locational accounts.
The Case For and Against UK REITs: A Three-Year Outlook (2025–2028)
UK Real Estate Investment Trusts (REITs) have long been a go-to for investors seeking high-yield, income-generating assets with low correlation to equities and the stability of hard assets, often as an alternative to owning rental properties. With their requirement to distribute at least 90% of rental income as dividends (Property Income Distributions, or PIDs), REITs offer yields that rival or exceed rental property returns, without the hassle of direct ownership. However, as the UK economic and property landscape evolves, are UK REITs still a compelling choice over the next three years (2025–2028)?
The Case For UK REITs: High Yields and Asset-Backed Stability
UK REITs present a strong case for investors looking to replicate the income and stability of rental properties without the operational burdens, particularly over the next three years.
- High Dividend Yields: UK REITs deliver yields that compete with or surpass rental property returns. As of July 2025, logistics REITs like Tritax Big Box (BBOX) and Warehouse REIT (WHR) offer yields of 7–8%, while healthcare-focused REITs like Target Healthcare REIT (THRL) provide 6–7%. These yields outstrip UK inflation (forecasted at 2–3% annually through 2028 by the Office for Budget Responsibility) and compare favorably to net rental yields of 4–6% for UK residential properties, after maintenance and management costs.
- Low Correlation to Equities: REITs have a lower correlation to the broader stock market (e.g., FTSE 100) compared to typical equities, with correlations often below 0.6, per Morningstar data. This makes them a diversification tool, as their performance is driven by property market fundamentals rather than stock market volatility. For instance, logistics REITs benefit from e-commerce growth, while healthcare REITs rely on demographic-driven demand, insulating them from tech or financial sector swings.
- NAV and Hard Asset Safety: REITs are backed by tangible assets—warehouses, care homes, retail centers—offering a safety net through their Net Asset Value (NAV). Many UK REITs trade at discounts to NAV (e.g., BBOX at 10–15%, THRL at 5–10% as of mid-2025), providing a margin of safety. If sold, these assets could theoretically return capital close to NAV, reducing downside risk compared to stocks with no physical backing.
- Property Market Recovery: After high interest rates depressed REIT valuations in 2022–2023, the UK property market is poised for recovery. The Bank of England’s base rate, projected to ease to 3–4% by 2028 (per Bloomberg consensus), should lower borrowing costs, boosting property valuations and REIT share prices. CBRE forecasts 3–5% annual rental growth for logistics properties and 2–3% for healthcare, driven by e-commerce and aging populations, respectively.
- Takeover Appeal: Undervalued REITs are attracting private equity and institutional buyers. For example, Warehouse REIT (WHR) is subject to a £489 million takeover bid from Blackstone at 115p per share (July 2025), a premium to its trading price. Such deals could deliver capital gains, enhancing total returns alongside dividends.
- Operational Simplicity: Unlike rental properties, REITs require no direct management—tenants, maintenance, or regulations are handled by professionals. This passive income stream appeals to investors seeking rental-like cash flow without the headaches of landlord responsibilities.
Market Sentiment: Discussions on platforms like X highlight optimism for logistics and healthcare REITs, citing strong demand for warehouses and care homes. Analysts at Barclays project 8–12% annualized total returns (dividends plus capital growth) for top-tier REITs through 2028, assuming stable rates and economic recovery.
The Case Against UK REITs: Risks and Challenges
Despite their strengths, UK REITs face risks that could undermine their appeal over the next three years, particularly for investors prioritizing high yields and asset-backed stability.
- Interest Rate Sensitivity: REITs are sensitive to interest rate changes, as higher rates increase borrowing costs and depress NAVs. While rates are expected to fall, unexpected inflation spikes or Bank of England tightening (e.g., above 4%) could hit REITs with high Loan-to-Value (LTV) ratios (e.g., 35–45% for some logistics REITs). This could lead to dividend cuts or dilutive equity raises, eroding income reliability.
- Economic Headwinds: UK GDP growth is forecasted at a modest 1–2% annually through 2028 (per IMF estimates), with risks from global trade disruptions or consumer spending declines. Weaker sectors like retail and office REITs face challenges from e-commerce shifts and remote working, though logistics and healthcare REITs are more resilient.
- Takeover Disruptions: While takeovers offer capital gains, they can disrupt income strategies. The WHR bidding war (Blackstone vs. Tritax Big Box, July 2025) shows how REITs can be acquired, converting dividend-paying shares into cash. Investors must then reinvest in a potentially less attractive market, risking lower yields or higher valuations.
- Operational Risks: REITs face property-specific issues, such as tenant defaults, rising maintenance costs, or regulatory changes (e.g., energy efficiency mandates). While logistics REITs benefit from long leases (5–10 years WAULT for BBOX), retail or mixed-use REITs may struggle with shorter leases or vacancies, impacting income stability.
- Correlation Creep: While REITs have lower equity correlation, they’re not immune to market downturns. During crises (e.g., 2022 rate hikes), REITs can fall alongside stocks, as seen when the FTSE All-Share and REIT indices both dropped 20–25%. This challenges their diversification edge for investors avoiding bond-like sensitivity.
- Tax and Regulatory Complexity: REIT dividends (PIDs) are taxed as property income, not dividends, potentially facing higher rates (e.g., 20–40% vs. 8.75% for dividends). While ISAs mitigate this, non-UK investors may face withholding taxes or reporting complexities, reducing net yields compared to rental properties.
Market Sentiment: Some X posts express caution about REITs’ rate sensitivity and weaker sectors like retail, with investors eyeing alternatives like infrastructure funds or commodities for diversification. Jefferies analysts warn of flat or negative returns for REITs if inflation exceeds 3.5%, highlighting macro risks.
Alternatives to UK REITs: High-Yield, Low-Correlation Options
For investors drawn to REITs as a rental property substitute—offering high yields, low equity correlation, and hard asset backing—several alternatives align with these goals, especially for those avoiding bonds due to their interest rate sensitivity or lower yields.
- Infrastructure Investment Trusts: Infrastructure trusts like HICL Infrastructure (HICL) or International Public Partnerships (INPP) invest in assets like roads, hospitals, and renewable energy projects, offering yields of 5–6%. These assets have low correlation to equities (around 0.4–0.5, per Morningstar) and are backed by tangible infrastructure with long-term, often government-backed contracts. Unlike REITs, they’re less sensitive to property market cycles but face risks from regulatory changes or project delays.
- Global Dividend ETFs: ETFs like JPMorgan Global Equity Premium Income (JEGP) or Vanguard FTSE All-World High Dividend Yield (VHYL) provide 5–7% yields with diversification across global equities. While more correlated to stocks (0.7–0.8), they reduce UK-specific risks and offer exposure to hard assets via sectors like utilities and energy. They lack the direct NAV safety of REITs but simplify management compared to rental properties.
- Commodity-Focused Funds: Funds like BlackRock World Mining Trust (BRWM) offer 5–6% yields through investments in mining companies tied to hard assets like gold, copper, or lithium. These have low equity correlation (0.3–0.5) due to commodity price drivers and provide inflation protection, but volatility is higher than REITs, and dividends can fluctuate with resource prices.
- Business Development Companies (BDCs) in the US: BDCs like Ares Capital (ARCC) yield 8–10% by lending to mid-sized businesses, backed by loan portfolios. They have moderate equity correlation (0.5–0.6) and asset-backed security, though they carry credit risk and currency exposure for UK investors. They’re a higher-risk, higher-reward alternative to REITs.
- Renewable Energy Trusts: Trusts like Greencoat UK Wind (UKW) or NextEnergy Solar Fund (NESF) offer 6–7% yields from wind farms or solar assets. These hard assets provide NAV-like stability, with low equity correlation (0.4–0.5) and inflation-linked contracts. However, they face risks from energy price volatility and government policy shifts.
Comparison to REITs: Infrastructure and renewable energy trusts match REITs’ low correlation and asset backing, with slightly lower yields but reduced property market exposure. Global dividend ETFs offer diversification but higher stock correlation, while BDCs and commodity funds provide higher yields at greater risk. None require the active management of rental properties, and all can be held in an ISA for tax-free income, though investors must weigh currency, regulatory, or sector-specific risks.
Strategic Considerations for 2025–2028
UK REITs remain a strong choice for investors seeking rental property-like income without bonds. Their 6–8% yields, low equity correlation, and NAV-backed safety appeal in a recovering property market, especially for logistics and healthcare REITs. However, interest rate risks, takeover disruptions, and economic uncertainty warrant caution. Investors should focus on REITs with low LTV ratios (below 35%), long leases (5+ years WAULT), and exposure to resilient sectors like logistics (e.g., BBOX) or healthcare (e.g., THRL). Diversifying with alternatives like infrastructure trusts or global dividend ETFs can enhance stability while maintaining income.
Over the next three years, monitor key indicators: Bank of England rate decisions (targeting 3–4%), rental growth (3–5% for logistics), and takeover activity. If rates rise above 4% or GDP growth falters, REITs may underperform, making alternatives like renewable energy trusts or commodity funds more attractive. For now, UK REITs offer a balanced mix of yield, diversification, and asset security, but careful selection and vigilance are essential.
Conclusion
UK REITs are a compelling substitute for rental properties through 2028, delivering high yields, low equity correlation, and hard asset safety in a recovering market. Yet, risks from interest rates, takeovers, and economic challenges highlight the need for diversification. Alternatives like infrastructure trusts, global dividend ETFs, or renewable energy funds offer similar benefits with different risk profiles, allowing investors to tailor their portfolios. Whether prioritizing income or preparing for market shifts, UK REITs and their alternatives provide robust options for passive, rental-like returns.
Disclaimer: No financial advice anywhere on this site.
