REITs, or Real Estate Investment Trusts, are a type of tax-efficient property fund that enables people to invest in property such as warehouses, offices and shopping centres without actually buying bricks and mortar.
Instead of buying a property as the average real estate investor would, those investing in REITs can actually invest in companies that invest themselves.
Introduced in January 2007, REITs can be easily traded on the stock exchange, unlike many other property investments.
They are exempt from paying corporation tax as long as at least 90% of profits are paid to shareholders. As a result, these shareholders receive higher payouts which they pay tax on them.
REITS are essentially a more inclusive form of property fund. Normally only super-rich and corporations can buy shopping centres and office blocks but REITs give everyone the chance to invest in a tax-efficient way in commercial property.
If you’d like to understand more about this type of property fund, read our beginners guide below.
Please bear in mind this guide is not personal advice. If you're not sure if an investment is right for you, please speak to a financial adviser or get in touch with one of our property consultants.
What Constitutes A REIT
REIT investing bears similarities to trading on the stock market. They are moulded after more familiar mutual funds, which means people can buy stock in them. However, not all stocks are REITs; there are certain criteria a company must meet to maintain its REIT status:
REITs must be a taxable corporation. They must invest a minimum of 75% of their overall assets in real estate.
They must obtain at least 75% of their gross income from either rental income, mortgage interest or real estate sales.
They must pay at least 90% of their taxable income to shareholders by dividends.
REITs must be run by either a board of trustees or directors.
They must have no less than 100 shareholders and the majority of shares must not be held by five or fewer shareholders.
British REITS must be a close-ended investment trust and be UK-resident and must be publically listed on the stock exchange recognised by the Financial Services Authority.
Each year the EPRA in Brussels publishes a breakdown of the UK REIT structure requirements
Types Of Real Estate Investment Trust
REITs offer an easy way for real estate investors to diversify their own portfolio to include everything from warehouses to offices and shopping centres. On top of that, here’s even more diversity offered up by the type of REIT you choose to invest in.
Equity REITs (REITs)
Anyone investing in equity REITs is actually investing in companies that, themselves, invest in portfolios of income-producing real estate. It is common for equity REITs to own and operate real estate in each major sector such as shopping centres, offices and apartment complexes. The majority of REITs publicly traded on today’s major market indices are Equity REITS.
Mortgage REITs (mREITs)
Mortgage REITs invest in mortgages and mortgage-backed securities rather than income-producing real estate. They essentially act as the bank and collect interest on the financing they provide for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities.
Public Non-Listed REITs (PLNRs)
Public non-listed REITs own, operate or finance income-producing real estate portfolios. They work much in the same way as regular REITs, with a few exceptions; a key one being that they aren’t traded on major securities exchanges and in particular face strict redemption restrictions levied by the U.S. Securities and Exchange Commission (SEC).
Private REITs do not trade on national stock exchanges. However, unlike PLNRs, private REITs are exempt from SEC registration and are therefore not beholden to the same disclosure requirements as other REITs. Private REITs are generally reserved for institutional investors, and nobody else.
REIT Advantages And Disadvantages
REITS are just like any other form of investment - there are advantages and disadvantages to consider.
The advantages of REIT investing are compelling enough to capture the attention of even the intrepid property investment beginners.
REIT investors can take advantage of a property market that has performed historically well without actually buying any bricks and mortar and instead buy what are essentially stocks traded on Wall Street. In fact, REITs have outperformed the returns exercised by traditionally traded U.S. stocks.
Companies need to pay at least 90% of their taxable income to shareholders in order to be classified as a REIT. These ‘dividends’ are good money-making vehicles for shrewd investors and can really help grow an investor’s bottom line.
Investors can buy into not only different industries but different REITs as well, such as ones that specialize in income-producing properties mortgages. The REITs themselves are equally as diverse; investors could buy into commercial properties such as shopping centres to apartment buildings.
REITs are particularly liquid because of their position on stock indices. Unlike physical real estate, the money investors have in REITs can be accessed relatively easily, and quickly. Therefore, transferring capital or reinvesting it isn’t difficult, at least compared to other investment vehicles.
Regulated by The Securities and Exchange Commission, most REITS are required to divulge important information like earnings reports, so there’s a lot more transparency in the REIT world than in several other investment vehicles. For the most part, investors can know what to expect, outside of predicting the actual market itself.
Investors have greater control if they buy into physical real estate compared to REITS. Success and failure are therefore mostly dependent on their own actions.
REITs must pay at least 90% of their taxable income to shareholders. They, therefore, have less money to reinvest in their own company and can be their own worst enemy.
The performance of REITs is tied to interest rate trends so when rates increase, they eat into the profit margins of REITs. Interestingly interest rates commonly increase when the economy is stable and strong enough to handle them. Some of the dividends shareholders receive are taxed as ordinary income, whereas most other dividends are taxed at a lower rate.
Despite the performance of REITs being tied to the real estate market, they can be influenced by market fluctuations.
Popular Known REITS
REITs were created in the United States in 1960. Since then, more than 30 countries around the world have established REIT regimes, with more countries in the works.
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