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Real Estate Investment Trust
A REIT (pronounced "reet") is a Real Estate Investment Trust which owns and manages both commercial or residential income-producing property. At least 90% of its taxable income is distributed to shareholders through dividends, in return for which the company is largely exempt from corporation tax.REITs are designed to offer investors income and capital appreciation from rented property assets in a tax-efficient way, with a return more closely aligned with direct property investment. This is achieved by taking away the 'double taxation' (corporation tax plus the tax on dividends) of ordinary property funds.
The UK REITs regime, which came into effect on 1 January 2007, was announced by Chancellor Gordon Brown in the March 2006 Budget. The following key details were included (as listed on www.reita.org) ;
- A UK REIT will be a UK tax-resident company but can be listed anywhere in the world provided it lists on one of the UK Government's recognised stock exchanges
- There are conditions in place which, in some cases, prevent investors from owning substantial holdings in REITs. The reason for these conditions is primarily to prevent unwanted tax avoidance and the loss of tax revenue for the UK Government through the application of double tax treaties to non-UK investors in UK REITs
- When an existing property company converts into a UK REIT, it will have to pay a tax charge of 2% of the value of the property owned by the company
- UK REITs will not pay tax on property rental income or chargeable gains
- UK REITs will have to distribute at least 90% of rental profits to investors, who will pay tax at their normal rates
- There are additional conditions that a UK REIT must satisfy; including conditions which limit the amount of debt financing (UK REITs will have to have rental profits of at least 1.25 times their loan interest payable).
It enables private investors to share in the same attractive returns from commercial property that were arguably previously only available to bigger investors.
Previously, for the average investor to access the commercial property sector they would have to buy shares in a listed property company. With the introduction of REIT’s in January 2007, however, investors are now able to gain access to a diversified portfolio of both residential and commercial property without the risks and hassle of direct ownership and with the enhanced tax benefits over listed property company shares. By doing this, one of the goals of the regime is to decrease the amount of commercial property owned by occupiers by increasing the demand for commercial property by private investors. The expectation is that this will free up capital invested in premises for use by businesses in their core activities.
Through UK REITs, investors can now invest in property without having to find and manage tenants and without being responsible for the bricks and mortar of a single building.
However, despite promises by many of a revolutionary new asset class, UK REIT’s, which are still in their infancy, are being described by some analysts as “their days may be numbered” or “living on borrowed time”.
According to a recent article in the Financial Times, in its first year, Britain is the only country where REIT’s are trading at a considerable discount to the net value of their assets. Whereas due to the tax benefits it is normal for REIT’s to trade at a premium to their net assets, (up to 50% in some cases) in Britain the two largest UK REIT’s were trading at discounts of up to 10%.
Other analysts state, however, that this situation is normal for REIT’s in their infancy and does not come as a surprise. Investors are still sceptical of the new regime and once investors realise the potential gains from the tax benefits, the regime will be a success.
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