Real estate investment trust
A real estate investment trust or REIT (pronounced /ˈriːt/) is a tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes. In return, REITs are required to distribute 90% of their income, which may be taxable, into the hands of the investors. 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 a REIT are its net asset value (NAV), adjusted funds from operations (AFFO) and cash available for distribution (CAD). REITs face challenges from both a slowing U.S. economy and the global financial crisis, depressing share values by 40 to 70 percent in some cases.
The REIT concept was launched in Australia in 1971. General Property Trust was the first Australian real estate investment trust (LPT) on the Australian stock exchanges (now the Australian Securities Exchange). REITs which are listed on an exchange were known as Listed Property Trusts (LPTs) until March 2008, distinguishing them from private REITs which are known in Australia as Unlisted Property Trusts. They have since been renamed Australian Real Estate Investment Trusts (A-REITs) in line with international practice.
There are now more than 70 A-REITs listed on the ASX, with market capitalisation in excess of A$100bn.
Australia is also receiving growing recognition as having the world’s largest REITs market outside the United States. More than 12 percent of global listed property trusts can be found on the ASX.
REITs were introduced in Brazil in 1993 by the law 8668/93 and initially ruled by the instruction 205/94 and, nowadays, by instruction 472/08 from CVM (Comissao de Valores Mobiliários - which is the Brazilian equivalent of SEC). Locally they are denominated FIIs or "Fundos de Investimento Imobiliário". FII's dividends are free of taxes for personal investors (not companies) since 2006, but only for the funds which has at least 50 investors and that are publicly negotiated in the stock market. FIIs, referred to as “REIT” as the similar investment vehicle in the US, have been used either to own and operate independent property investments and associated with a single property or a portion thereof, or owning several real properties (multiple properties) and funding them through the public capital markets.
REITs were introduced in Bulgaria in 2004 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.
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. REITs have been excluded from the income trust tax legislation passed in the 2007 budget by the Conservative government. Many Canadian REITs have limited liability.
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 political resistance to these plans, especially by the social democratic party ('SPD'). 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.
A law concerning G-REITs was enacted 1 June, 2007, and is retroactive to 1 January, 2007.
REITs will have to be established as a corporation "REIT-AG" or "REIT-Aktiengesellschaft".
At least 75% of its assets have to be invested in real-estate.
At least 75% of the G-REIT's gross revenues must be real-estate related.
At least 90% of the REIT's taxable income has to be distributed to its shareholders through dividends.
The corporation is income-tax-exempt, but the shareholders will have to pay individual income tax on the dividends.
REITs have been in existence in Hong Kong since 2005, when The Link REIT was launched by the Hong Kong Housing Authority on behalf of the Government. Since 2005, there have been 7 REIT listings as at July 2007, most of which, including Sunlight REIT have not enjoyed success due to low yield. Except for The Link and Regal Real Estate Investment Trust, share prices of all but one are significantly below IPO price. Hong Kong issuers' use of financial engineering (interest rate swaps) to improve initial yields has also been cited as having deterred investors' interest
As of January 2010, India was formulating legislation for 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 an 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 Securities 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, a favourable investment opportunity, and a clear taxation policy will provide the right kind of investing opportunity in India in the time to come.
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.
The Securities and Exchange Commission of Pakistan is in process of implementing REIT regulatory framework that will allow full foreign ownership, free movement of capital and unrestricted repatriation of profits. It will curb speculation in Pakistani real estate markets and gives access to small investors diversifying into real estate as well. The Securities and Exchange Commission of Pakistan following regulatory framework similar to Singapore and Hong Kong REITs.
The Securities and Exchange Commission of Pakistan expects that about six REITs will be licensed within the first year, mainly large assets management companies applying for it. Pakistan is recently seeing an outflux of investments by foreign real estate development mostly Malaysian and Dubai based companies.
Commonly referred to as S-REITs. There are currently 20 REITs listed on the SGX, starting with CapitaMall Trust in July 2002. They represent a range of property sectors including retail, office, industrial, hospitality and residential. S-REITs hold a variety of properties in countries including Japan, China, Indonesia and Hong Kong, in addition to local properties.
S-REITs are regulated as Collective Investment Schemes under the Monetary Authority of Singapore's Code on Collective Investment Schemes, or alternatively as Business Trusts.
S-REITs benefit from tax advantaged status.
United Arab Emirates
The REIT legislation was introduced by Dubai International Financial Centre (DIFC) to promote the development of REIT’s in the UAE by passing The Investment Trust Law No.5 that went into effect of August 6, 2006. This restricts all 'true' REIT structures to be domiciled within the DIFC. The first REIT license to be issued will be backed by Dubai Islamic Bank with a REIT named 'Emirates REIT.'
The legislation laying out the rules for REITs in the United Kingdom was enacted in the Finance Act 2006 and came into effect in January 2007 when nine UK property companies converted to REIT status, including the five that were FTSE 100 members at that time: British Land, Hammerson, Land Securities, Liberty International and Slough Estates (now known as "SEGRO"). The other four were: Brixton, Great Portland Estates, Primary Health Properties and Workspace Group.
British REITs have to distribute 90% 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 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 the British Property Federation and Reita. The Reita campaign was launched on 16 August 2006 by the REITs and Quoted Property Group, in order to provide a source of 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.
Doug Naismith, managing director of European Personal Investments for Fidelity International, said: "As existing markets expand and REIT like structures are introduced in more countries, we expect to see the overall market grow by some ten percent per annum over the next five years, taking the market to $1 trillion by 2010."
REITs recently took centre stage in Nigeria when the N50billion Union Homes Hybrid Real Estate Investment Trust was launched in September 2008. In 2007, the Securities and Exchange Commission (SEC) issued the first set of guidelines for the registration and issuance of requirements for the operation of REITs in Nigeria is detailed in the Investment and Securities Act (ISA).
Public REITs in the United States
In the United States a REIT is a company that owns, and in most cases operates, income-producing real estate. Some REITs finance real estate. To be a REIT, a company must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
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
Be managed by a board of directors or trustees
Have transferable shares or transferable certificates of interest
Otherwise be taxable as a domestic corporation
Not be a financial institution or an insurance company
Be jointly owned by 100 persons or more
Have 95 percent of its income derived from dividends, interest, and property income
Pay dividends of at least 90% of the 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 (5/50 rule)
At least 75% of total investment assets must be in real estate
Derive at least 75% of gross income from rents or mortgage interest
No more than 20% of its assets may consist of stocks in taxable REIT subsidiaries.