Definition of a Real Estate Investment Trust

In my ultimate guide on how to invest in property, I list REITs as one of the popular methods.

But what does REIT mean? What does REIT stand for, and what are the characteristics that define a REIT?

Definition of a Real Estate Investment Trust

REIT stands for Real Estate Investment Trust. As the name suggests, they are a type of investment trust (Read more: definition of investment trust).

REITs are a specialist type of investment trust which complies with a strict set of investment rules in order to avoid tax. This Real Estate fund structure is popular with retail investors.

The purpose of a REIT is to provide investors with a tax-efficient way to receive property income from a huge portfolio. In effect, they allow you to become a landlord without directly buying a property yourself.

The tax benefits of a REIT

REITs were designed to solve a historic issue of double-taxation, where an investor would see property income taxed twice if it was received from a trust. Income would first be subject to corporation tax within the fund, then again taxed as dividend income.

This penalised investors who used collective investment vehicles for the property asset class, compared to owning property directly. Any rental income would be reduced by almost half by the time it reached the investor’s bank account.

The solution? REITs are exempt from corporation tax.

Read more: The best corporate tax textbooks.

However, to avoid this tax break being used by other forms of collective investment schemes, the regulator sets clear rules on how a fund qualifies as a REIT.

Characteristics of a REIT

The REIT rules include the requirement to distribute 90% of property income to shareholders as a dividend each year. This means that a fund must pay income and cannot retain a high proportion of its profits to reinvest in other projects.

REITs are also required to invest in land or invest in property with at least 75% of their total assets. This prevents other equity or bond funds from claiming REIT status by allocating a token % of their assets to property.

Some REITs are so large that they are listed in the FTSE 100 index of companies. REITs also exist on US stock exchanges and in other countries, although their characteristics may vary as they will be subject to local tax and company laws.

Large REITs in the UK include:

British Land – A FTSE 100 constituent which produces an annual income of £500m per year. British Land has supported high profile projects such as the Leadenhall building.

Land Sec – Previously known as Land Securities, this is currently the largest REIT in the UK and produces income in excess of £700m per year. In its broad property portfolio, Landsec actually holds the famous London Piccadilly lights tourist attraction.

Our guide to the best REITs in the UK contains many additional examples.

How to buy a REIT

A REIT is a company listed on the stock exchange, therefore shares in a REIT can be bought in the same way as shares in any other publicly listed companies.

You could use a stockbroker or the best stocks & shares ISAs to hold your REIT in a tax-efficient manner. Buying shares may incur a trading fee, which will be charged at the rate for UK shares if the REIT is listed on the London Stock Exchange.

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