Real estate investment trust

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A Real Estate Investment Trust or REIT (rēt, rhymes with treat) is a tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.

Like other corporations, REITs can be publicly or privately held. Public REITs may be listed on public stock exchanges like shares of common stock in other firms.

REITs can be classified as equity, mortgage or hybrid.

The key-statistics to look at in REITs are its NAV (Net Asset Value) and AFFO (Adjusted Funds From Operations) / CAD (Cash At Disposal).

[edit] Australian REITs

See also: List of public REITs in Australia

Australian REITs (Listed Property Trusts) were first listed on the Australian Stock Exchange (ASX) in the early 1970s.

[edit] Bulgarian REITs

REITS were introduced in Bulgaria in 2003 with the so called "Special Purpose Investment Companies Act". They are pass-through entities for corporate income tax purposes (i.e. they are not subject to corporate income tax), but are subject to numerous restrictions.

[edit] Canadian REITs

See also: List of public REITs in Canada

Canadian REITs were established in 1993. They are required to be configured as trusts and are not taxed if they distribute their net taxable income to shareholders. This tax benefit has been modified by the Conservative government and will be void by 2011. Many Canadian REITs have limited liability.[1]

[edit] German REITs

Germany is also planning to introduce German REITs (short G-REITs) in order to create a new type of real estate investment vehicle. Government fears that failing to introduce REITs in Germany would result in a significant loss of investment capital to other countries. Nonetheless there still is resistance to these plans, especially by the social demcoratic party. As of June 2006 the ministry of finance has announced that they still plan to introduce G-REITs in 2007. The legal details seem to adopt much of UK-REITs regulations (taxation, public listing, etc.), as far as it is possible to tell yet.

G-REITS will be introduced as of January 1st 2007.

[edit] Indian REITs

India is currently in the process of formulating definitive legislation for the introduction and smooth functioning of REITs in the Indian real estate market. Once introduced these Indian REITs (country specific/generic version I-REITs) will help individual investors enjoy the benefits of owning interest in the securitised real estate market. The best benefit being that of fast and easy liquidation of investments in the real estate market unlike the traditional way of disposing real estate. The government and Secutities and Exchange Board of India SEBI through various notifications is in the process of easing the norms of investing in real estate in India directly and indirectly through foreign direct investment, through listed real estate companies, mutual funds etc. With the current real estate boom and the market being flooded with Initial Public Offer of various listed real estate companies in India it will be the best time for investors to own a share of the profiting market economy. Legislative framework, revised investment norms and a favourable investment opportunity, and a clear taxation policy will provide the right kind of investing opportunity in India in the time to come.

[edit] Japanese REITs

See also: List of public REITs in Japan

Japan is one of a handful of countries in Asia with REIT legislation (other countries/markets include Hong Kong, Singapore, Malaysia, Taiwan and Korea), which permitted their establishment in December 2001. J-REIT securities are traded on the Tokyo Stock Exchange, and most participants are Japanese conglomerates and foreign investment banks.

Since the burst of the real estate bubble in 1990, property prices in Japan have seen steady drops through 2004, with some signs of price stabilization and possibly price increase in 2005 and 2006. Some see J-REITs as a way to increase investment in the real estate market, although notable increases in asset values has not yet been realized.

A J-REIT may be structured as an independent corporation or as a contractual relationship through a trust bank.

In addition to REITs, Japanese law also provides for a parallel system of special purpose companies which can be used for the securitization of particular properties, but not for the maintenance of a real estate portfolio.

[edit] United Kingdom REITs

See also: List of public REITs in the United Kingdom
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The legislation laying out the rules for UK REITs is due to be enacted in the Finance Act 2006 and will come into effect in January 2007.

UK REITS will have to distribute 95% of their income. They must be a close-ended investment trust and be UK resident and publicly listed on a stock exchange recognised by the Financial Services Authority.

To support the successful introduction of REITs in the UK, the REITs and Quoted Property Group was created by several commercial property and financial services companies. Other key bodies involved are the London Stock Exchange and the British Property Federation.

The Reita campaign was launched on 16 August 2006 by the REITs and Quoted Property Group, in order to provide an impartial source of expert information on REITs, quoted property and related investments funds.

Reita's aim is to raise awareness and understanding of REITs and investment in quoted property companies. It does this primarily through its portal www.reita.org, providing knowledge, education and tools for financial advisers and investors.

[edit] United States REITs

See also: List of public REITs in the United States

In the U.S., REITs generally pay little or no federal income tax, but are subject to a number of special requirements set forth in the Internal Revenue Code, one of which is the requirement to annually distribute at least 90% of its taxable income in the form of dividends to its shareholders.

In recent practice, many REITs distribute all of or even more than their current earnings, often resulting in dividend yields comparable to bond yields. If an investment company such as a REIT distributes more than its taxable income, the excess distribution is considered "return of capital" for tax purposes (taxed as a capital transaction, rather than regular income). The distribution requirement may hamper a REIT's ability to retain earnings and generate growth from internal resources. This and other restrictions imposed by the Internal Revenue Code generally limit a REIT's suitability for growth-oriented investors. However, other considerations may result in potential for stock price appreciation, such as improvements in the REITs underlying leasing markets, changes in interest rates or increasing demand for REIT stocks. In America, brokers suggest that REITs make up about 5 to 10 percent of an investors portfolio.[citation needed]

As of early 2005, there were nearly 200 publicly traded REITs operating in the United States. Their assets included a combined $500 billion, and approximately two-thirds of them were trading on national stock exchanges. The number of REITs not registered with the Securities Exchange Commission and not publicly traded is about 800.[1]

[edit] Qualification

In order to qualify for the advantages of being a pass-through entity for U.S. corporate income tax, a REIT must:

  • Be structured as corporation, trust, or association[2]
  • Be managed by a board of directors or trustees[3]
  • Have transferable shares or transferable certificates of interest[4]
  • Otherwise be taxable as a domestic corporation[5]
  • Not be a financial institution or an insurance company[6]
  • Be jointly owned by 100 persons or more[7]
  • Have 95 percent of its income derived from dividends, interest, and property income[8]
  • Pay dividends of at least 90% of REIT's taxable income
  • No more than 50% of the shares can be held by five or fewer individuals during the last half of each taxable year
  • At least 75% of total investment assets must be in real estate
  • Derive at least 75% of gross income from rents or mortgage interest
  • Have no more than 20% of its assets consist of stocks in taxable REIT subsidiaries.

[edit] Footnotes

  1. ^ Mark Rothschild (November/December 2005). Spotlight on North America/Canada. NAREIT.com. Retrieved on 2006-10-17.
  2. ^ Internal Revenue Code Sect. 856(a)
  3. ^ Internal Revenue Code Sect. 856(a)(1)
  4. ^ Internal Revenue Code Sect. 856(a)(2)
  5. ^ Internal Revenue Code Sect. 856(a)(3)
  6. ^ See Internal Revenue Code Sect. 856(a)(4). See also Internal Revenue Code Sect. 582(c)(2) (defining financial institutions for these purposes); Internal Revenue Code Sect. 801 et. seq. (defining insurance companies for these purposes).
  7. ^ Internal Revenue Code Sect. 856(a)(5).
  8. ^ Internal Revenue Code Sect. 856(c)(2)

[edit] See also

[edit] External links

[edit] Additional reading

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