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Real Estate Investment Trust (Benefits for REIT companies (If a company or…
Real Estate Investment Trust
Closed ended companies
May be a single company or a group REIT owning and managing property on behalf of its shareholders
They are companies solely dedicated to property investment meaning that unlike many other property investments, they can hold commercial and/or residential property but not owner occupied buildings
Traded on the LSE or AIM
Provide a relatively easy method for retail investors to access property investments indirectly for minimum outlay while providing shareholders with exposure to the risks and rewards of owning property without actually having to make a property purchase
For a company to qualify for REIT status there are a number of specific criteria that must be satisfied. These are determined by HMRC and include the following
Company conditions - a potential UK REIT has to carry out a property rental business which may be a UK property investment business or alternatively an overseas property investment business
Property rental business conditions - at least 75% of the company's profits must derived from that property rental business
Balance of business conditions - at least 75% of the company's gross assets must comprise assets or cash involved in the property rental business
If REIT status is granted, it will neither pay corporation tax nor capital gains tax on their property investments
Most appropriate for income investors rather than those seeking capital growth as they have to pay out 90% of their income derived from property to shareholder
Benefits for REIT companies
If a company or group of companies is granted REIT status this will grant exemption from corporation tax on profits and gains from their UK qualifying property rental businesses
The provision of a tax efficient structure
Access to new investor capital
Potentially closer performance to NAV
Benefits for REIT investors
Provision of tax transparency
Provision of potentially high yield returns, as REITS must distribute at least 90% but maybe more of their taxable income derived from property rental income to shareholders
The income being treated as property rental income rather than dividends - the taxation from property is transferred form the corporate level to investor level
If a REIT, or the sector in which it invests, is particularly popular, demand might cause the share price to move to a premium over the NAV. The same process in reverse might cause the REIT to a discount. However, as a general rule, REIT share prices will tend to move in harmony with the NAV
Since REITs are required to pay out 90% of their income to investors, it can be difficult for them to accumulate sufficient capital to reinvest in new properties from their own earnings. For companies looking to expand, there will be two main methods of funding growth – selling new shares, perhaps by a rights issue or alternatively increasing debt/gearing
REIT debt is usually measured in relation to the NAV through what is called loan-to-value (LTV), the proportion of the property portfolio that is funded by borrowings