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Real Estate Investment Trusts (REITs)

October 13, 2020

Let’s Look at REITs

It rhymes with ‘neat’ and it isn’t as complicated as some experts would have you believe. What is it? That’s right – today we’re delving into the world of the real estate investment trust (REIT).

 

We’ll take a look at how they operate and find out why so many property companies scrambled for REIT status upon launch in the UK over a decade ago.

 

In a Nutshell

Put simply, a REIT is a company which finances, owns and operates income-generating property.

 

At its heart is a structure modelled a little like a mutual fund, but instead of purchasing securities, investors pool their capital into property. REITs let investors earn money from a  property portfolio without having to buy property or roll up their sleeves to do the work of a landlord.

 

Most REITs operate in specific sectors like office or retail but some have diverse holdings. Portfolios can include anything from office space to storage, data centres, warehouses, health facilities and more.

 

Real estate investment trusts generate income by renting or leasing space and distributing it to shareholders as a dividend.

 

REITs are publicly traded. They’re highly liquid and the dividends have helped earn the best of them a cult-like following in some investment circles.

 

REITs in the UK

Some 40 countries across the globe have REIT regimes or equivalents in place. The UK’s regime launched in 2007, prompting around 80% of publicly listed property companies to convert.

 

The UK’s REIT regime has been evolving ever since, and the trusts have grown more attractive and accessible to investors year on year.

 

What are the Benefits?

Money is a universal language, and wherever you happen to be, REITs are a byword for tax-efficient investment. So REIT status can unlock access to significant international investment for property-based companies.

 

Within the REIT, profits and gains are tax-exempt, including for property sales and the sale of shares. However, the REIT must distribute the lion’s share (90%) of its tax-exempt profits in the form of a Property Investment Distribution (PID), as well as all of its property income from other UK REITs.

 

Without getting into the nitty-gritty of taxation specifics, it’s safe to say that in almost all cases, investors enjoy tax savings on REIT returns compared to those from UK companies. For basic to additional rate-paying individuals, the efficiency is around 5%.

 

Achieving REIT Status

Companies must satisfy a whole host of conditions to achieve and maintain REIT status. Breaching them can lead to expulsion and exposure to higher tax liabilities.

 

First, there are those distribution conditions mentioned earlier. Companies must also be listed or traded on a recognised stock exchange and there are also restrictions on close companies becoming REITs. (Close companies are privately owned and controlled by five or fewer participators).

 

But that’s not all.  At least three-quarters of the REITs gross assets must relate to property rental. The REIT must hold at least three properties with no single property exceeding 40% of the rental portfolio value.

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