REITs: What are they?

A guide to Real Estate Investment Trust companies

A Real Estate Investment Trust or REIT (pronounced “reet”) is a company that owns and manages a portfolio of properties and mortgages.

They are a corporation, trust or association that acts as an investment agent but must qualify for this status under set regulations. Examples of these in the UK are British Land, Hammerson and Land Securities.

REITs are a pool of properties and mortgages that are bundled together in a unit investment trust. They allow people to invest in large-scale, income-producing property that they might not be able to afford on their own, even with a commercial mortgage. These could include: office buildings, shopping centres, hotels, flats, warehouses and self-storage facilities to name a few.

Income is generated through renting, leasing, or selling the properties and is distributed directly to REIT shareholders on a regular basis.

When a REIT pays out, the net income is equally distributed among investors as a percentage of paid-out taxable income. Anyone can buy shares in a publicly-traded REIT, meaning you can 'own' real estate, without the responsibility of being a landlord.

REITs must pass these qualifications:

British REITs have to distribute 90% of their income to shareholders.

They must be UK based

They must be publicly listed on a stock exchange recognised by the Financial Services Authority.

They must be a close-ended investment trust. This means it can only issue shares to the public once, with additional shares having to be approved by the current shareholders, unlike open-ended REITs that issue and redeem shares at any time.

The REIT must have at least 75% of its assets invested in property or mortgages, and 75% of its gross income must come from rents, mortgage interest or capital gains from selling.

A REIT must have at least 100 shareholders.

Types of REITs

Equity REITs

These are trusts that own or rent properties and then collect the rent and capital gains once the property is then sold. These are the most popular of REITs and are more of a long-term investment due to the rental income aspect.

Mortgage REITs

These loan out money for mortgages to property owners, and make their money through the loan interest. This means they are vastly dependent on market interest rates.

Hybrid REITs

These combine both equity and mortgage REITs. They can invest in either single or multiple groups of projects, and they can have a fixed term or indefinite life.

How to invest in REITS

Buyers can invest in REITs directly by buying shares or indirectly through a collective investment scheme such as an Authorised Unit Trust (AUT) through buying units in a scheme that invests in REITs.

They can also invest in REITs through ISAs or Self Invested Personal Pension (SIPP).

Pros

REITs are appealing for several reasons:

Tax efficient - they are currently exempt from Corporation Tax.

Improved liquidity - the shares can be easily and quickly sold.

Reduced barriers to entry -  REITs reduce the financial barriers to entry. You don't have to invest money and time in buying a property directly and they provide access to property investments for minimal entry outlay.

Diversification - they can diversify your investment over a number of different properties, reducing the risks associated with investing in one property. 

Less overall risk - they also tend to fluctuate less and offer market security. Investing in a series of portfolios, rather than a single building also minimises financial risk.

Higher yields - Because REITs have to give 90% of their income, they offer higher yields than fixed-income assets.

Cons

Income can fluctuate - income on REITs can fluctuate. In the years since the financial crash, commercial property has suffered and some companies have folded, having a bad impact on some REITs.

They can be risky - this depends on the geographical location - if buyers invest in an area that is likely to to be hit by a downturn then it can be more risk that its worth. So, thoroughly research the location before you invest. 

Less control - if you enjoy being hands-on, REITS may not be for you, because the control lies with the fund managers. If you feel you have a good understanding of commercial property, investing directly in commercial property may be a better option for you than buying shares in REITs.



Melanie Luff

About the author

Melanie Luff is an in-house journalist and writes for all titles in the Dynamis stable including BusinessesForSale.com, FranchiseSales.com and PropertySales.com as well as other industry publications.

@Be_TheBoss