UK REITs - Real Estate Investment Trusts

Many people with an interest in investing in property have probably heard of real estate investment trusts, or (REITs). They have been a popular form of investment in the USA for a number of years.

Traditionally, for the private investor, the only feasible way to benefit from the healthy returns experienced by the investment property sector has been to invest in bricks and mortar, with buy-to-let being perhaps the most popular option. For those who don't have the capital outlay required or are nervous about committing to a 100% mortgage, or maybe are not sure where and when to purchase a viable buy-to-let property, there have been virtually no alternatives. With the introduction of UK-REITS in January 2007, this is no longer the case. A small capital outlay gives anyone the chance to get a slice of the property pie.

REITs allow the smaller investor to buy into real estate without having to physically own particular properties. They also give those with less capital the opportunity to invest in the property sector and benefit from potentially big returns on their outlay.

Since new legislation was announced by Gordon Brown in the budget of 2006, REITs have become an option for British property investors, more specifically; UK-REITs (to give them their full title), now represent valuable additions to investment portfolios.

What are REITs?

Defined as a company that is listed on a regulated investment exchange, e.g. The London Stock Exchange, a UK-REIT is a vehicle for investing in property which carries certain tax liability advantages.

Although we refer to REITs as real estate investment trusts, they are not in fact trusts as most people understand the term. They are just like any other private investment companies. The only substantial difference is that once registered as REITs, companies will benefit from various tax breaks and these tax advantages are passed on to you as a REIT investor. The company owns revenue-producing commercial and residential properties, which in turn generate potentially high returns for investors.

The easier option

Launched on the 1st of January 2007 as a way of making it easier for ordinary investors to invest in a variety of both UK and overseas property, REITs allow you to invest in commercial real estate such as shopping centres, out of town retail parks and offices, as well as residential properties.

As an investor in a REIT, you don't actually own a part of a property, but you do benefit indirectly in the form of annual dividends from rental profits generated by the REIT. What is more, you also gain from certain tax breaks, another advantage is the fact that your investment interest is easy to buy and sell, giving you the liquidity that you won't find with traditional property investment choices. Here is what REIT specialist website www.reita.org says about the taxation advantages:

"Before REITs were launched in the UK, quoted property companies suffered from a type of double taxation; first, companies had a pay corporation tax and secondly, investors had a pay tax on their share dividends. It was felt this put property companies at a disadvantage as compared with investing direct (e.g. buying a buy-to-let property) where there was only one taxation charge, i.e. where investors paid tax on rental income."

"REITs were therefore setup with a number of rules in place, in return for which the companies became largely exempt from corporation tax. A principle qualifying requirement is that at least 90% of the company's taxable income is distributed to shareholders through dividends."

Why did the British government introduce REITs?

“The government wanted to encourage more people to invest in a greater diversification of property previously unavailable to them. Specifically they wanted to encourage the smaller investor to put their money into the commercial property sector”. Reita.org goes on to say:

"Introducing REITs meant removing taxation as a factor unduly affecting the choice between direct and indirect property investment. Investors would also be able to buy and sell their interests easily (having the benefit of liquidity) and invest in a diverse variety of properties, as opposed to putting all their cash into, say, one buy-to-let property."

“By initiating UK REITs the British Government also aspired to support and encourage retail investors by permitting REITs to be held in tax sheltered personal finance products, like ISAs and SIPP”s.

Why invest in REITs – The potential benefits

With the launch of UK-REITs, smaller investors are now able to put their money, albeit indirectly, into a much more diverse property portfolio.

REITs allow investors to buy relatively inexpensive and above all, easily tradable units, so they no longer have to buy an entire property to get a handsome return on their capital outlay.

The tax-efficient structure of REITs is another big advantage for the smaller investor. It allows them to avoid double taxation that traditional investors in property company shares have had to endure. Because tax is not payable on rental or capital gains earned through a REIT (as the REIT organisation is exempt from corporation tax on qualifying property income and gains). Investors will only be liable for tax due on income received as dividends.

As UK-REITs pay out a large portion (90%) of their profits in dividends; they're extremely attractive to income seeking investors. Reita.org lists some of the key benefits to investors: