Real Estate Investment Trusts

REIT or Real Estate Investment Trusts are hitting the headlines with developers like Land Securities, the developer of the Exeter’s new City Centre retail scheme along with some other big names in the English commercial property industry converting themselves from plc status into a REIT. What are these? How are they different from a “normal” property company and how will they affect businesses and individuals?

Income and Rent Exempt from Corporation Tax
REIT are similar to other investment trusts but with a mandate to invest in property and are well established in other countries, in particular America. The main difference for a REIT is its rental income and gains on disposals of investment property are exempt from corporation tax, unlike a property company. Profits and gains on other activities (for instance property trading) are subject to corporation tax in the usual way.

These advantages, of course, come at a price. A REIT must distribute at least 90% of its tax exempt income each year. So the shareholder pays the tax rather than the Company. Other conditions are important. These include a requirement for the shares of the REIT be listed on a recognised stock exchange and no one investor may own or control more than ten per cent of the REIT. These two factors, together with the two per cent charge on the value of the properties at the time that the Company changes its status to REIT, will inevitably limit the number of REITs.

As far as the REIT shareholder is concerned, dividends received from the tax exempt profits are taxed in the same way as income from UK property and paid under deduction of basic rate income tax. Higher rate tax payers pay an additional 25% tax on the dividend.

Relatively secure property investment
What are the advantages for the investor/shareholder? For the private investor a REIT gives him an opportunity to invest in commercial and residential property and enjoy a relatively secure and regular income stream. The necessity to distribute at least 90% of the income means a shareholder’s income is regular and not subject to the whim of the directors Given that the REIT is quoted on a stock exchange the investor will be able to buy or sell his investment easily and inexpensively, unlike any direct investment in property. So a REIT is an effective way for an investor to invest in the commercial and residential market. Pension funds including SIPPS will also be able to purchase shares in REITs

At the moment only 15% of commercial real estate is owned by publicly quoted companies with the remainder owned by private companies trusts, pension funds and foreign investors. If REITS prove popular with the investing public then there will be a strong market in commercial property as REITS seek to assemble portfolios of property.

As REITs need to be quoted most west country businesses will not establish REITs themselves but work closely with REITs to provide them with appropriate rent producing products. Land Securities are producing such a product themselves in Exeter and their shareholders will soon be enjoying dividends provided at least in part by the Princesshay development in Exeter.