INVESTMENT
REITs may not sound exciting but they could provide vast numbers of new homes, says
All REIT now ’s Practitioner.
B
uried in the budget of March 2011 were some rather surprising, but welcome, proposals to reform legislation governing Real Estate Investment Trusts, REITs, widening their appeal to
investors with potential for residential investment by REITs – at long last.
WHAT IS A REIT? A UK REIT as defined by Deloittes, February 2010, is a UK residential listed company that undertakes a “property rental business” and has elected to enter the REIT regime, but which excludes income and capital gains from owner occupied buildings. The intention of the REIT regime is to
replicate the tax treatment of direct investment in property since income tax and capital gains are exempt at the REIT level but taxed at the investor level when received by way of dividend.
TAX TREATMENT To ensure income and gains are taxed at investor level, REITs are required to distribute the majority of their tax exempt rental income known as Property Income Distributions, PIDs. Basic rate tax at 20 per
66 AUGUST 2011 PROPERTYdrum
cent is generally withheld from the dividend except when it is paid to a pension fund or a UK resident company. UK corporation tax is levied on any
non-rental income or gains and taxed in the hands of investors as normal company dividends.
THE HISTORY REITs were invented in the USA, the largest and most varied REIT market. Over the years a range of specialist REITs have been developed focusing on narrow sectors of the property market – hotels, shopping centres, industrial parks, residential blocks and many more in addition to those with a more varied diet. Australia followed in 1971 with 70+
REITs and has become the largest market outside the USA. Canada followed in 1993 with smaller countries following suit, Finland joining in as late as 2010. The rules adopted by each country vary
widely although the basic concept remains the same. Finland, for example, requires that 80 per cent of funds should be invested in residential property and that 80 per cent of income should be derived from the residential letting business: 90 per cent of income excluding gains must be distributed to shareholders.
REITS IN THE UK Were established by the Finance Act 2005 and could begin trading from January 2007. The original rules were restrictive, limiting investment to commercial property. Companies wishing to join the REIT regime were required to be: UK resident
•
• • •
Listed on an exchange approved by the FSA
Pay two per cent of net asset value as a joining fee
Distribute 90 per cent of rental income and gains to shareholders
Despite these restrictions, nine of the
larger and well known property companies converted, including British Land, Hammerson, Land Securities, Liberty International and Segro.
WHY INVEST IN A REIT? First, the vehicle gives all of the advantages of direct investment in rented property without the hassle of personal membership. Governance by both the FSA and the visibility of quoted company audits are some guarantee of proper behaviour by the companies concerned. There are clear tax advantages in the hands of those investors who pay tax at the
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