Real Estate Investment Trust (REIT)

Investments » Real Estate Investment Trust

What is a REIT?

Types of Investments

A REIT, or "Real Estate Investment Trust", is a listed company that owns and manages a portfolio of property – commercial or residential, although often predominantly commercial – with the intention of generating for shareholders in that company.

This effectively means that investors can enter the property market by buying shares in a REIT, rather than buying property directly. Shares in a REIT can be bought and sold as easily as shares in any other company, and are not subject to initial fees or annual management charges; typical share dealing costs do, however, apply. A REIT, unlike a traditional property company, is not liable for corporation tax on business activities related to property and, furthermore, may allow access to areas of the property market – industrial property for example – that are otherwise inaccessible to private investors. REITs were initially developed for markets in the United States, but have been available in the United Kingdom since January 1st, 2007.

REIT Features, Benefits & Considerations

Property, in the form of physical bricks and mortar, can be difficult and expensive to buy or sell so investment in a REIT can provide an affordable, and convenient, alternative. REITs are also transparent with regard to tax and avoid the double taxation conundrum of traditional property investment. Previously, listed property companies paid corporation and capital gains tax, whilst shareholders paid capital gains tax and income tax; if a REIT distributes at least 90% of its profits to shareholders – which, indeed, it must do to obtain "REIT" status in the first place – it is no longer liable for corporation tax.

There are further rules and regulations in place regarding the structure and running of a REIT, designed for the protection of investors. A REIT must, for example, own at least 3 properties, no single property can represent more than 40% of the total assets of the company, and at least 75% of its income must come from property. The fact that 90% of profits are distributed to shareholders means that yields can be high for those seeking income rather than capital growth. Dividends – a.k.a. PID, or "Property Income Distribution" – are liable for tax, at 22% and possibly capital gains tax. Transaction costs, however, are low; stamp duty on shares in a REIT in the United Kingdom is just 0.5% compared to anything up to 4% for traditional property investment.

Investment in a REIT may, of course, expose an investor to a higher level of volatility and risk than direct investment in property. Shares in a REIT are affected not only by events in the commercial or residential property markets but also by those in wider equity markets which may produce large fluctuations –favourable or otherwise – than the stock market overall. Essentially, a REIT creates exposure to the NAV or "Net Asset Value" of the property owned by a REIT, plus the value that the market chooses to place on shares in the REIT.

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