Real Estate Investment Trusts ("REITs") provide a tax-efficient and accessible method for real estate investment. A REIT is a corporate entity that acquires, develops, manages, and sells real estate on behalf of investors. It raises funds from private institutional investors or public listings to build and manage a real estate portfolio, distributing rental income and capital gains to investors efficiently.
REITs are utilised across various sectors to generate income and capital from properties. For example, Healthcare REITs use their investment funds to develop / purchase care homes, hospitals and other medical facilities and make their money by leasing such facility to both publicly and privately owned healthcare providers.
Key advantages of REITs include:
REITs are an attractive option, becoming increasingly popular due to potential efficiencies in structuring, to raise large amount of capital to purchase property and kickstart development projects. REITs can:
- Potentially raise large sums of money either through a public listing or from private investors; or
- Simulate direct property investments without the requirement of a sizeable upfront deposit.
Furthermore, they can provide numerous advantages for investors, including:
Tax Treatment: REITs are exempt from corporation tax on income and capital gains from property, providing tax efficiency for investors.
Stable Income: They offer a steady income stream from rent, with a requirement to distribute 90% of tax-exempt income to investors. REITs are forced to distribute this, since 90% of tax-exempt income profits (typically rents) must be distributed to their investors, although there is no requirement to distribute capital gains.
Portfolio diversification: REITs typically have a large number of portfolio properties under their control, and allow regular investors to diversify their portfolios into the real estate market alongside any other forms of investments they may hold, e.g. stocks.
Capital Gains: if a REIT is admitted to trading, and listed on a recognised stock exchange, investors have access to markets to sell their interests in the REIT.
Accessibility: Provides real estate market exposure without the property ownership logistics or make sizeable deposits for such a property and make regular mortgage repayments.
Listed vs Unlisted REITs
As of April 2022, unlisted companies can achieve REIT status if 70% of ordinary shares are owned by "institutional investors", therefore, they are no longer required to be listed on a recognised stock exchange. This provides those looking to set up a REIT with greater flexibility as to how they want to seek funding from investors, particularly, those that wish to avoid the burdensome reporting obligations with a listing.
For those seeking to raise capital from a wide variety of investors, and who perhaps do not have the necessary connections with private institutional investors, the liquidity and publicity of a listed REIT could be highly appealing.
Legal Structure
REITs are typically structured as unit trusts where investors acquire units with income or capital rights. The trustee (a REIT corporate entity) holds legal property title for investors.
Conditions for REIT Status (UK): Companies must meet complex criteria including tax residency, share ownership, and property holding conditions. Qualifying criteria ensure that REITs primarily derive income from property rental and meet asset value thresholds.
Such conditions include that the company must:
Property rental:
- Hold at least three properties, with no single property representing more than 40% of the total value of the properties of the business; or
- Must involve at least one commercial property with a value of £20 million or more.
Balance of business conditions:
- REITs must derive at least 75% of its income profits from its tax-exempt business; and
- The value of the assets involved in the tax-exempt business must be at least 75% of the value of the REIT's total assets.
How can we assist?
If you are considering setting up a REIT (or any other property investment vehicle) please contact us to speak to a member of our Corporate or Real Estate Team who can advise you on your best available options, achieving REIT status, and the transaction process,
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.