What exactly is a REIT and can I hold it in my SIPP or ISA?

Q: What exactly is a REIT and can I hold it in my SIPP or ISA?

A: The acronym REIT stands for ‘Real Estate Investment Trust’. An investment trust, or investment company as they are often now known, is set up as a listed company, whose sole purpose is to manage an investment portfolio. With a REIT, this is a portfolio of commercial or residential property holdings, whereas most investment companies invest in shares or bonds.

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Investment companies are closed-ended funds. This means that the investment vehicle itself (the company structure) is listed on the stock market. Rather than buying units in a mutual fund, investors buy and sell shares in this investment company.

This can be a particularly useful structure when investing in less liquid assets such as property. As anyone who has ever moved house will know, transactions to buy and sell property can move slowly, even when there are willing buyers and sellers.

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So with a REIT, if an investor wants to sell their holding, they simply sell the shares in the REIT to another buyer. This means the managers of the REIT don’t have to sell assets to pay out redemptions — which can be particularly beneficial during market downturns, when there may be a rush of sellers looking to redeem their holdings, which can lead to a fire-sale of assets. In theory, this helps with the longer-term management of the investment portfolio.

However, this does mean that there are often periods where there can be a difference between the underlying value of the investment portfolio and the daily price of the investment company shares. These can either trade at a discount or a premium — depending on market demand — when compared to the underlying value of the investment portfolio (known as the NAV). This can mean that even if the portfolio of investment assets has increased in value, an investor may not get this full value if they sell their shares in the open market.

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Many ISAs and SIPPs will allow you to invest in REITs alongside other investment trusts and mutual funds. However it is always worth checking the terms and conditions, as it will depend on the platform used. Fidelity’s ISA and SIPPs do allow you to hold and trade REITs.

Most ISA or SIPP holders will be largely invested in listed shares, so REITs can add valuable diversification.

As well as hoping to gain from any capital appreciation in these property holdings, many of these properties will also generate a regular rental income. To qualify as a REIT, 90% of this must be distributed to shareholders via dividend payments each year.

• Read: Is my portfolio diversified enough?
• Read: Do I pay tax on any withdrawals from my ISA?
• Read: How is the gold price calculated?

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Property and land can be difficult to sell so an investor may not be able to cash in this investment when they want to. The value of property is generally a matter of a valuer's opinion rather than fact. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). The shares in investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.