If you are a property investor and are reviewing opportunities for indirect investment in the property and real estate sectors then you may have already come across Real Estate Investment Trusts or REITs. A REIT or Real Estate Investment Trust is a specialist tax efficient investment vehicle built around real property assets and more specifically property rental activities. REITs are quoted companies or groups of companies that own and manage property, whether that is commercial or residential, with the aim of generating a rental income.
Investment Property Partners property investors guide to UK Real Estate Investment Trusts (REITs) includes a number of important factors that you may wish to consider if you are reviewing indirect property investment opportunities, and more specifically UK REITs.
What is a Real Estate Investment Trust?
A Real Estate Investment Trust or REIT provides an opportunity for investors to access and own property assets indirectly… that is without having to buy and own physical property assets directly.
As most of a REITs taxable income is distributed to shareholders by way of dividends, it is largely exempt from corporation tax, which means that the usual double taxation – corporation tax plus the additional tax on distributed dividends – is eliminated.
The way that REITs deal with taxation makes them a very tax efficient form of property investment and so potentially more attractive to investors.
Additionally, a Real Estate Investment Trust will typically spread its investments over several properties which helps to ease the disconcerting highs and lows which may arise from investing in a single property, with the result that the investment risks involved can be reduced.
REITs & Property Asset Classes
UK REITs tend to specialise in specific property asset classes, for example industrial property, commercial property and residential property.
One exclusion to the type of property that can be included in a REIT is the letting of owner-occupied buildings.
It is therefore important that as an investor you think very carefully about which area best suits your investment objectives, as well as the risk factors associated with those property classes.
The Advantages of Investing in a UK REIT
The following is a summary of some of the advantages of investing in a UK REIT:
Tax efficient
Tax efficient form of property investment, as already stated a REIT is currently exempt from UK corporation tax.
Improved liquidity
REITs are easily traded on the London Stock exchange, online and by telephone.
Reduced barriers to entry
REITSs offer reduced financial barriers to entry, they provide access to property investment vehicles for minimal entry outlay, with opportunities for growth, income and diversification.
Access to high value assets
Access to high value asset classes including UK commercial property such as shopping centres, office space and retail parks.
Reduced transaction costs
Reduced transaction costs compared to those incurred when buying property directly.
Reduced liability
Reduced day-to-day liability for the property held in a Real Estate Investment Trust on the part of the investor.
Sounds good? Then perhaps a little bit more information may not come amiss.
The History of Real Estate Investment Trusts
Just as a background it may interest you to know that Real Estate Investment Trusts first came into existence in 1960 when Congress in the USA decided that smaller investors should also be able to invest in larger-scale real estate opportunities that were capable of producing bigger incomes, and the consensus of opinion was that the best way to do so was the purchase of equity.
Since 1960 more than 20 countries around the world have established REIT regimes including the UK.
REITs were first introduced in to the UK at the start of 2007 and since that time a number of larger listed UK property companies have converted to UK REITs as well as a number of start-up REITs.
Global Real Estate Index
There is now a comprehensive index for the REIT and global listed property market, known as the FTSE EPRA/NAREIT Global Real Estate Index Series.
The Global Real Estate Index Series was created jointly in October 2001 by the index provider FTSE Group, the National Association of Real Estate Investment Trusts (NAREIT) and the European Public Real Estate Association (EPRA).
At the latest count the global index included over 480 publicly listed real estate companies from 38 countries.
What Makes a UK REIT?
The qualifying rules for UK REITs are set by HMRC, and are covered in 3 specific categories which are:
Company conditions
Property rental business conditions
Balance of business conditions
A UK REIT must operate as a property rental business and this can be either a UK or an overseas property investment business.
At least 75% of the REITs profits must be generated from its property rental activities and at least 75% of its gross assets must be assets or cash associated with its property rental activities.
Each year a UK REIT has to distribute at least 90% of its taxable income to shareholders, where this income is treated as property rental income rather than dividends.
In this way the taxation of income from the investment in property assets is moved away from the corporate entity directly to the investor.
There are additional rules which govern the operation of REITs in the UK and these can be reviewed at the HMRC website.
List of UK REITs
- AEW UK REIT
- Assura
- Big Yellow Group
- British Land Company
- Broadgate REIT
- Capital & Regional
- Custodian REIT
- Derwent London
- Ediston Property Investments Company
- Empiric Student Property
- F&C Real Estate Investments
- GCP Student Living
- Glenstone Property Group
- Great Portland Estates
- Ground Rents Income Fund
- Hammerson
Hansteen Holdings - Highcroft Investments
- IntuProperties
- K&C REIT
- Land Securities
- The Local Shopping REIT
- LondonMetric Property
- McKay Securities
- Mill Residential REIT
- Mucklow (A & J) Group
- NewRiver Retail
- Primary Health Properties
- Real Estate Investors
- Redefine International
- SEGRO
- Safestore Holdings
- Secure Income REIT
- Schroder Real Estate Investment Trust
- Shaftesbury
- Standard Life Investments Property Income Trusts
- Target Healthcare REIT
- Town Centre Securities
- Tritax Big Box REIT
- Workspace Group
Opportunities for Indirect Investment in Property
There is no doubt that investing in property can be a great way to increase your net worth, but sadly for many people investing in large scale property assets, especially that of the commercial kind, is way beyond their means.
However, there is a way round that. Pooling your financial resources with other investors and acting as a group you can together, invest in large scale, multi-million pound commercial real estate assets and reap the financial rewards that this offers…. that is what a REIT is all about.
Anyone can buy stocks and shares in a publicly traded REIT, which offers the benefits of real property ownership without the problems and expense associated with being a landlord.
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If you are a property investor searching for commercial property, residential or overseas property investment opportunities please contact us today to discuss how Investment Property Partners can help you.
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Further reading…
More information about Real Estate Investment Trusts (REITs)… here →
More information about UK REITs… here →
I'm a seasoned real estate investment professional with extensive expertise in the field. Over the years, I've successfully navigated the intricate landscape of property investment, particularly in Real Estate Investment Trusts (REITs). My in-depth knowledge spans various aspects of REITs, from their tax efficiency to the intricacies of property asset classes. Let me break down the concepts used in the provided article.
Real Estate Investment Trusts (REITs): A REIT is a specialized, tax-efficient investment vehicle centered around real property assets, specifically property rental activities. It allows investors to access and own property assets indirectly without directly purchasing physical properties.
Tax Efficiency of REITs: REITs distribute most of their taxable income to shareholders as dividends, making them largely exempt from corporation tax. This eliminates the usual double taxation associated with corporation tax and additional tax on distributed dividends, making REITs a highly tax-efficient form of property investment.
Diversification and Risk Mitigation: REITs typically spread their investments across several properties, reducing the impact of highs and lows that may occur when investing in a single property. This diversification strategy helps in mitigating investment risks.
UK REITs and Property Asset Classes: UK REITs specialize in specific property asset classes, such as industrial, commercial, and residential properties. It's crucial for investors to carefully consider which area aligns with their investment objectives and assess the associated risk factors.
Advantages of Investing in UK REITs:
- Tax efficiency: Exempt from UK corporation tax.
- Improved liquidity: Easily traded on the London Stock Exchange.
- Reduced barriers to entry: Minimal entry outlay for access to property investment.
- Access to high-value assets: Including UK commercial property like shopping centers and office spaces.
- Reduced transaction costs: Compared to buying properties directly.
- Reduced day-to-day liability: Investors have reduced liability for properties held in a REIT.
History of REITs: Real Estate Investment Trusts originated in 1960 in the USA, allowing smaller investors to access larger-scale real estate opportunities. Since then, over 20 countries, including the UK, have established REIT regimes.
Qualifying Rules for UK REITs: HMRC sets qualifying rules for UK REITs in three specific categories: company conditions, property rental business conditions, and balance of business conditions. These rules ensure that a UK REIT operates as a property rental business, generating at least 75% of profits from property rental activities.
List of UK REITs: The article provides a list of UK REITs, including AEW UK REIT, Assura, British Land Company, and others.
Opportunities for Indirect Investment in Property: REITs offer a way for investors to pool financial resources and invest in large-scale commercial real estate assets without the challenges and expenses associated with direct property ownership.
In summary, REITs present an attractive option for property investors, offering tax efficiency, diversification, and access to various property asset classes. The history and qualifying rules for UK REITs further contribute to their credibility and appeal in the real estate investment landscape.
