about REITs

REITs

What is a REIT?

• A Real Estate Investment Trust (REIT) is a single company REIT or a group REIT that owns and manages property on behalf of shareholders.
• A REIT can contain commercial and/or residential property but excludes the letting of owner-occupied buildings.
• REITs provide a way for investors to access the risks and rewards of holding property assets without having to buy property directly.
• In the UK, a company or group of companies can apply for ‘UK-REIT’ status, which exempts the company from corporation tax on profits and gains from their UK qualifying property rental businesses.
• In return, UK-REITs are required to distribute at least 90% of their taxable income, for each accounting period, into the hands of investors, where the income is treated as property rental income rather than dividends. In this way taxation of income from property is moved from the corporate level to the investor level.

The REIT regime, combined with the traditional strengths of London’s capital markets, has created opportunities for the growth of the property investment sector. The legislation setting out the rules for REITs in the United Kingdom came into effect in January 2007 and in the following years, a number of larger listed property groups converted to UK-REITs as well as a number of start up UK-REITs being created. REITs enable property companies to access equity markets and to give end-investors performance related to the underlying property assets, without any tax leakage. UK-REITs therefore provide investors with wider opportunities for accessing an important alternative asset class

How to qualify as a REIT?

There are a number of qualifying conditions that a company needs to meet in order to become a UK-REIT.  These qualifying conditions, as determined by HMRC, fall into 3 categories; company conditions, property rental business conditions and balance of business conditions. In particular, a potential UK-REIT has to carry out a property rental business which can be a UK property investment business or an overseas property investment business.  At least 75% of the group’s profits must derive from that property rental business and at least 75% of the group’s gross assets must comprise assets or cash involved in the property rental business.

Further details of the conditions required to be met to enter, and remain within, the UK-REIT regime can be found on the HMRC website at the link below:

HMRC

Definition of 'Real Estate Investment Trust - REIT' A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents. Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans. Hybrid REITs: Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.

Investopedia explains 'Real Estate Investment Trust - REIT' Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate. An additional benefit to investing in REITs is the fact that many are accompanied by dividend reinvestment plans (DRIPs). Among other things, REITs invest in shopping malls, office buildings, apartments, warehouses and hotels. Some REITs will invest specifically in one area of real estate - shopping malls, for example - or in one specific region, state or country. Investing in REITs is a liquid, dividend-paying means of participating in the real estate market. Need more details on the REIT? Read The REIT Way and Add Some Real Estate to Your Portfolio.

Real estate investment trust

From Wikipedia, the free encyclopedia

Under U.S. Federal income tax law, a real estate investment trust (REIT) (pron.: /ˈriːt/) is "any corporation, trust or association that acts as an investment agent specializing in real estate and real estate mortgages" under Internal Revenue Code section 856.^[1] The rules for federal income taxation of REITs are found primarily in Part II (sections 856 through 859) of Subchapter M of Chapter 1 of the Internal Revenue Code. Because a REIT is entitled to deduct dividends paid to its owners, a REIT may avoid incurring all or part of its liabilities for U.S. federal income tax. To qualify as a REIT, an organization makes an "election" to do so by filing a Form 1120-REIT with the Internal Revenue Service, and by meeting certain other requirements. The purpose of this designation is to reduce or eliminate corporate tax, thus avoiding double taxation of owner income. In return, REITs are required to distribute at least 90% of their taxable income into the hands of investors. A REIT is a company that owns, and in most cases, operates income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and even timberlands. Some REITs also engage in financing real estate. The REIT structure was designed to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks.^[2]

REITs can be publicly or privately held. Public REITs may be listed on public stock exchanges.

REITs can be classified as equity, mortgage, or a hybrid.

The key statistics to examine in a REIT are net asset value (NAV), funds from operations (FFO), and adjusted funds from operations (AFFO). In the period from 2008 to 2011, REITs faced challenges from both a slowing United States economy and the late-2000s financial crisis, which depressed share values by 40 to 70 percent in some cases.^[3]

France [edit]

The French acronym for REIT is SIIC. In France, Unibail-Rodamco is the largest SIIC.^[25] Gecina is the second largest publicly traded property company in France, with the third highest asset value among European REITs.^[26][27]

Germany [edit]

Germany is also planning to introduce German REITs (short, G-REITs) in order to create a new type of real estate investment vehicle. Government fears that failing to introduce REITs in Germany would result in a significant loss of investment capital to other countries. Nonetheless there still is political resistance to these plans, especially by the social democratic party ('SPD').

A law concerning G-REITs was enacted 1 June 2007, and was retroactive to 1 January 2007:^[28]

• REITs will have to be established as a corporation "REIT-AG" or "REIT-Aktiengesellschaft".
• At least 75% of its assets have to be invested in real-estate.
• At least 75% of the G-REIT's gross revenues must be real-estate related.
• At least 90% of the REIT's taxable income has to be distributed to its shareholders through dividends.
• The corporation is income-tax-exempt, but the shareholders will have to pay individual income tax on the dividends.
• Some restrictions apply on establishing residential REIT's

As of July 2012, there are four G-REITs listed with one company registered at the Federal Central Tax Office (Bundeszentralamt für Steuern) as pre-REIT. These four G-REITS are Alstria office REIT with a total market capitalization of €711 million, Hamborner with a total market capitalization of €321 million, Colonia Real Estate with a total market capitalization of €150 million and Fair Value REIT with a total market capitalization of €35 million. The German public real estate sector accounts for 0.21% of the total global real estate investment trust (REIT) market capitalization. Three out of the four G-REITS are also represented in the EPRA index, an index managed by the European Public Real Estate Association (EPRA).^[29]

United Kingdom [edit]

The legislation laying out the rules for REITs in the United Kingdom was enacted in the Finance Act 2006 and came into effect in January 2007 when nine UK property companies converted to REIT status, including five FTSE 100 members at that time: British Land, Hammerson, Land Securities, Liberty International and Slough Estates (now known as "SEGRO"). The other four companies were Brixton (now known as "SEGRO"), Great Portland Estates, Primary Health Properties and Workspace Group.^[30]

British REITs have to distribute 90% of their income. They must be a close-ended investment trust and be UK resident and publicly listed on a stock exchange recognised by the Financial Services Authority.^{[citation needed]} The European Public Real Estate Association in Brussels each year publishes a breakdown of the UK REIT structure requirements.^[31]

To support the introduction of REITs in the UK, the REITs and Quoted Property Group was created by several commercial property and financial services companies. Other key bodies involved are the London Stock Exchange the British Property Federation and Reita. The Reita campaign was launched on 16 August 2006 by the REITs and Quoted Property Group, in order to provide a source of information on REITs, quoted property and related investments funds. Reita's aim is to raise awareness and understanding of REITs and investment in quoted property companies. It does this primarily through its portal www.reita.org, providing knowledge, education and tools for financial advisers and investors.^[32]

Doug Naismith, managing director of European Personal Investments for Fidelity International, said: "As existing markets expand and REIT-like structures are introduced in more countries, we expect to see the overall market grow by some ten percent per annum over the next five years, taking the market to $1 trillion by 2010."^[33]

The Finance Act 2012 brought five main changes to the REIT regime in the UK, being (i) the abolition of the 2% entry charge to join the regime - this should make REITs more attractive due to reduced costs; (ii) relaxation of the listing requirements - REITs can now be AIM quoted^[34] (the London Stock Exchange’s international market for smaller growing companies) – making a listing more attractive due to reduced costs and greater flexibility; (iii) a REIT now has a three-year grace period before having to comply with close company rules (a close company is a company under the control of five or fewer investors); (iv) a REIT will not be considered to be a close company if it can be made close by the inclusion of institutional investors (authorised unit trusts, OEICs, pension schemes, insurance companies and bodies which are sovereign immune) - this makes REITs attractive Real Estate Investment Trusts; (v) the interest cover test of 1.25 times finance costs is not as onerous.

Boyd Carson of Sapphire Capital Partners LLP commented that "the most important of these advantages is the ability for REITs to be listed on the AIM and the abolition of the 2% entry charge to the regime is also a significant step forward."^[35]

Canada [edit]

See also: List of REITs in Canada

Canadian REITs were established in 1993. They are required to be configured as trusts and are not taxed if they distribute their net taxable income to shareholders. REITs have been excluded from the income trust tax legislation passed in the 2007 budget by the Conservative government. Many Canadian REITs have limited liability.^[36] On December 16, 2010, the Department of Finance proposed amendments to the rules defining “Qualifying REITs” for Canadian tax purposes. As a result, “Qualifying REITs” are exempt from the new entity-level, “specified investment flow-through” (SIFT) tax that all publicly traded income trusts and partnerships are paying as of January 1, 2011.^[37]

Mexico [edit]

Mexico recently passed legislation to allow for the equivalent of REITs, known as FIBRAS (Fideicomiso de Infraestructura y Bienes Raíces), to be traded in the Mexican Stock Exchange. The first Mexican REIT was launched in 2011 and is called FIBRA UNO.

United States [edit]

See also: List of public REITs in the United States

In the United States, a REIT is a company that owns, and in most cases operates, income-producing real estate. Some REITs finance real estate. To be a REIT, a company must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.^[38]

To qualify as a REIT under U.S. tax rules, a company must:

• Be structured as a corporation, trust, or association^[39]
• Be managed by a board of directors or trustees^[40]
• Have transferable shares or transferable certificates of interest^[41]
• Otherwise be taxable as a domestic corporation^[42]
• Not be a financial institution or an insurance company^[43]
• Be jointly owned by 100 persons or more^[44]
• Have 95 percent of its income derived from dividends, interest, and property income^[45]
• Pay dividends of at least 90% of the REIT's taxable income
• Have no more than 50% of the shares held by five or fewer individuals during the last half of each taxable year (5/50 rule)
• Have at least 75% of its total assets invested in real estate
• Derive at least 75% of its gross income from rents or mortgage interest
• Have no more than 25% of its assets invested in taxable REIT subsidiaries.

Because of their access to corporate-level debt and equity that typical real estate owners cannot access, REITs have a favorable capital structure. They are able to use this capital to finance tenant improvement costs and leasing commissions that less capitalized owners cannot afford.