A Real Estate Investment Trust or REIT is a tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes. In return, REITs are required to distribute 90% of their income, which may be taxable in the hands of the investors. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.
Like other corporations, REITs can be publicly or privately held. Public REITs may be listed on public stock exchanges like shares of common stock in other firms.
REITs can be classified as equity, mortgage or hybrid.
The key statistics to look at in REIT are its NAV (Net Asset Value), AFFO (Adjusted Funds From Operations) and CAD (Cash Available for Distribution).
- The REIT concept was launched in Australia in 1971. General Property Trust was the first Listed Property Trust (LPT) on the Australian stock exchanges (merged in 1987 to form the Australian Stock Exchange - ASX). REITs which are listed on an exchange are known as Listed Property Trusts (LPTs), distinguishing them from private REITs which are known in Australia as Unlisted Property Trusts.
There are now more than 60 LPTs listed on the ASX, with market capitalisation in excess of A$100bn.
Australia is also receiving growing recognition as having the worldâ€™s largest REITs market outside the United States. More than 12 per cent of global listed property trusts can be found on the ASX.
REITS were introduced in Bulgaria in 2003 with the so called "Special Purpose Investment Companies Act". They are pass-through entities for corporate income tax purposes (i.e. they are not subject to corporate income tax), but are subject to numerous restrictions.
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 proposed in the 2007 budget by the Conservative government. Many Canadian REITs have limited liability.
German REITsGermany 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'). As of June 2006 the ministry of finance has announced that they still plan to introduce G-REITs in 2007. The legal details seem to adopt much of UK-REITs regulations (taxation, public listing, etc.), as far as it is possible to tell yet.
A law concerning G-REITs was enacted 1 June, 2007, and is retroactive to 1 January, 2007.
- 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.
Hong Kong REITs
REITs have been in existence in Hong Kong since 2005, when The Link REIT was launched by the Hong Kong Housing Authority on behalf of the Government. Since 2005, there have been 7 REIT listings as at July 2007, most of which, including Sunlight REIT have not enjoyed success due to low yield. Except for The Link and Regal Real Estate Investment Trust, share prices of all but one are significantly below IPO price. Hong Kong issuers' use of financial engineering (interest rate swaps) to improve initial yields has also been cited as having deterred investors' interest
India is currently in the process of formulating definitive legislation for the introduction and smooth functioning of REITs in the Indian real estate market. Once introduced these Indian REITs (country specific/generic version I-REITs) will help individual investors enjoy the benefits of owning an interest in the securitised real estate market. The best benefit being that of fast and easy liquidation of investments in the real estate market unlike the traditional way of disposing real estate. The government and Securities and Exchange Board of India SEBI through various notifications is in the process of easing the norms of investing in real estate in India directly and indirectly through foreign direct investment, through listed real estate companies, mutual funds etc. With the current real estate boom and the market being flooded with Initial Public Offer of various listed real estate companies in India it will be the best time for investors to own a share of the profiting market economy. Legislative framework, revised investment norms and a favourable investment opportunity, and a clear taxation policy will provide the right kind of investing opportunity in India in the time to come.
Japan is one of a handful of countries in Asia with REIT legislation (other countries/markets include Hong Kong, Singapore, Malaysia, Taiwan and Korea), which permitted their establishment in December 2001. J-REIT securities are traded on the Tokyo Stock Exchange, and most participants are Japanese conglomerates and foreign investment banks.
Since the burst of the real estate bubble in 1990, property prices in Japan have seen steady drops through 2004, with some signs of price stabilization and possibly price increase in 2005 and 2006. Some see J-REITs as a way to increase investment in the real estate market, although notable increases in asset values has not yet been realized.
A J-REIT may be structured as an independent corporation or as a contractual relationship through a trust bank.
In addition to REITs, Japanese law also provides for a parallel system of special purpose companies which can be used for the securitization of particular properties, but not for the maintenance of a real estate portfolio.
Commonly referred to as S-REITs. There are currently 20 REITs listed on the SGX. Benefit from tax advantaged status.
United Kingdom REITs
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 the five that were FTSE 100 members at that time: British Land, Hammerson, Land Securities, Liberty International and Slough Estates (now known as "SEGRO"). The other four were: Brixton, Great Portland Estates, Primary Health and Workspace.
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.
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 and the British Property Federation. 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 http://www.reita.org/, providing knowledge, education and tools for financial advisers and investors.
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."
United States REITs
In the U.S., REITs generally pay little or no federal income tax, but are subject to a number of special requirements set forth in the Internal Revenue Code, one of which is the requirement to annually distribute at least 90% of their taxable income in the form of dividends to shareholders.
In order to qualify for the advantages of being a pass-through entity for U.S. corporate income tax, a REIT must:
- Be structured as corporation, trust, or association
- Be managed by a board of directors or trustees
- Have transferable shares or transferable certificates of interest
- Otherwise be taxable as a domestic corporation
- Not be a financial institution or an insurance company
- Be jointly owned by 100 persons or more
- Have 95 percent of its income derived from dividends, interest, and property income
- Pay dividends of at least 90% of the REIT's taxable income
- No more than 50% of the shares can be held by five or fewer individuals during the last half of each taxable year
- At least 75% of total investment assets must be in real estate
- Derive at least 75% of gross income from rents or mortgage interest
- No more than 20% of its assets may consist of stocks in taxable REIT subsidiaries.
Trends and Statistics
In recent practice, many REITs distribute all of or even more than their current earnings, often resulting in dividend yields comparable to bond yields. If an investment company such as a REIT distributes more than its taxable income, the excess distribution is considered "return of capital" for tax purposes (not taxed as ordinary income, but first reduces basis in REIT stock; if this brings the basis to zero, then remaining amount of the return on capital is taxed at capital gain rates). The distribution requirement may hamper a REIT's ability to retain earnings and generate growth from internal resources. This and other restrictions imposed by the Internal Revenue Code generally limit a REIT's suitability for growth-oriented investors. However, other considerations may result in potential for stock price appreciation, such as improvements in the REIT's underlying leasing markets, changes in interest rates, or increasing demand for REIT stocks.
As of early 2005, there were nearly 200 publicly traded REITs operating in the United States. Their assets included a combined $500 billion, and approximately two-thirds of them were trading on national stock exchanges. The number of REITs not registered with the Securities Exchange Commission and not publicly traded is about 800.
- Mark Rothschild (November/December 2005). Spotlight on North America/Canada. NAREIT.com.^ Alan O'Sullivan (1 June 2007). G-Reit news for German property. citywire.co.uk.
- Tim LeeMaster & Yvonne Liu, "Swire considers Festival Walk reit", Page B1, South China Morning Post, July 12, 2007
- Internal Revenue Code Sect. 856(a)
- Internal Revenue Code Sect. 856(a)(1)
- Internal Revenue Code Sect. 856(a)(2)
- Internal Revenue Code Sect. 856(a)(3)
- See Internal Revenue Code Sect. 856(a)(4). See also Internal Revenue Code Sect. 582(c)(2) (defining financial institutions for these purposes); Internal Revenue Code Sect. 801 et. seq. (defining insurance companies for these purposes).
- Internal Revenue Code Sect. 856(a)(5).
- Internal Revenue Code Sect. 856(c)(2)
- Real Estate Investment Trusts at the Open Directory Project
- National Association of Real Estate Investment Trusts
- EPRA - European Public Real Estate Association
- UK REITs a beginners guide
- Portal on REITs in Germany (English)
- A Call for the Creation of Socially Responsible Real Estate Investment Product
- "REITs create rental refugees" at Habitat International Coalition