What is a Real Estate Investment Trust (REIT)?
A Real Estate Investment Trust (REIT) is a company that primarily focuses on income-producing real estate. The concept originated in the United States in the 1960s with the aim of making large-scale, income-producing real estate accessible to investors. In the UK, for a company to qualify as a REIT, it must:
- Be resident in the United Kingdom.
- Own at least three properties that are let to third parties.
- Distribute at least 90% of its taxable income to shareholders annually.
Tax Benefits of REITs
REITs are exempt from UK corporation tax on profits and gains from their property rental business. This tax-exempt status provides a significant advantage as it translates into higher returns for investors. The dividend-like payments from REITs are taxed in shareholders’ hands as rental income, rather than as dividend income, providing potentially favorable tax treatment.
Key Characteristics
- Diversification: By investing in multiple properties, REITs help mitigate the risks associated with single-property ownership.
- Liquidity: Shares of publicly traded REITs can be easily bought and sold on the stock exchange, unlike direct real estate investments.
- Income Generation: REITs are mandates to distribute a majority of their income, thus offering a robust income stream to investors.
Examples of REITs
British Land Company PLC
One of the largest and most established REITs in the UK. British Land invests in offices and retail spaces across the country and is known for its extensive property portfolio.
Land Securities Group PLC
Another major player in the UK REIT market, Land Securities focuses on retail, office, and residential properties. It provides a significant portion of its income as dividends to shareholders.
SEGRO PLC
Specializing in industrial properties, SEGRO manages a diverse portfolio of warehouses and distribution spaces across the UK and Europe, catering primarily to the logistics sector.
Frequently Asked Questions
What is the minimum number of properties a REIT must own?
A REIT must own and manage a minimum of three properties to qualify for REIT status in the UK.
Are REIT distributions taxed as dividend income?
No, distributions from REITs are taxed as rental income in the shareholders’ hands, not as dividend income.
Do REITs pay UK corporation tax?
REITs are exempt from UK corporation tax on profits derived from their property rental business, making them tax-efficient investment vehicles.
How often do REITs have to distribute income to shareholders?
REITs are required to distribute at least 90% of their taxable income to shareholders annually.
Can REITs invest in properties outside of the UK?
Yes, while UK REITs must be resident in the UK, they are not restricted from owning properties internationally.
Is it easier to invest in a REIT than to buy real property?
Generally, yes. Purchasing shares of a REIT provides access to real estate investment without the complexities and costs associated with purchasing and managing physical property.
Are there any limitations on the properties a REIT can own?
The primary limitation is that the properties must be let to third parties. Beyond that, REITs can own various types of real estate including commercial, residential, industrial, and retail properties.
Can REITs be listed on stock exchanges?
Yes, many REITs are publicly traded and listed on major stock exchanges, providing liquidity and ease of access for investors.
Related Terms
- Dividend Reinvestment Plan (DRIP): A plan offered by REITs allowing shareholders to reinvest their dividends into additional shares, often without brokerage fees.
- Capital Gains Tax: A tax on the profit made from the sale of a property or investment.
- Yield: Annual income generated from an investment expressed as a percentage of the investment’s cost.
- Marketable Securities: Financial instruments that can be easily converted into cash such as stocks, bonds, and REIT shares.
Online References
Suggested Books for Further Studies
- “Investing in REITs: Real Estate Investment Trusts” by Ralph L. Block
- “The Intelligent REIT Investor: How to Build Wealth with Real Estate Investment Trusts” by Stephanie Krewson-Kelly and Glenn Mueller
- “REITs For Dummies” by Brad Thomas
