What are REITs?
A Real Estate Investment Trust or REIT (pronounced ‘reet') is a company that owns and, in most cases, manages property on behalf of shareholders. REITs give you a way to invest in buy-to-let property without having to buy property directly.
Essentially, real estate investment trusts offer an alternative way to invest in property. If you're considering investing in buy-to-let, you may want to look into REITs, since these have the benefit of giving you access to a portfolio of properties without having to own a single house and without the hassle that accompanies being a landlord.
A brief history of REITs
While REITs have been around in the States since the 1960s, they are relatively new to the UK; the necessary legislation only came into effect in January 2007. Despite quite a few listed property companies converting to UK REITs and new ones coming into being over the past decade, REITs remain a comparatively unknown property investment vehicle in the UK.
A UK REIT can comprise either a single company or a group of companies, and is allowed to contain commercial, office, industrial or residential property types – or a combination of all four.
All REITs must be publicly listed on the London Stock Exchange or AIM. They are exempt from paying corporation tax on profits and gains from their UK property rental business. In exchange, they must distribute at least 90% of their taxable income to investors. This is treated as property rental income rather than dividends, which means that taxation of property income happens at investor level rather than at the corporate level.
What are the benefits?
- Allows you to invest in property without the hassle and outlay of purchasing a buy-to-let property
- Allows you to diversify your investment over a number of properties, thereby reducing the level of risk
- As an investor, you aren't responsible for properties held in a REIT
- Depending on the REIT, there are opportunities for both growth and income, and there is the potential for high-yield returns
- REITs are more tax efficient than ordinary property funds, which are liable for corporation tax and tax on dividends
- As investments are publicly listed, REITs have high liquidity, meaning it's easy to buy and sell shares
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