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Back to basics: what is a REIT?

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Written by:
21/10/2013
A quick guide to investing in real estate investment trusts.

What is a real estate investment trust?

A real estate investment trust, or a REIT, is a publicly listed investment company that owns and manages a portfolio of properties and mortgages on behalf of its shareholders.

Anyone can buy a share in a publicly traded REIT. If the REIT you invest in does well, you will receive a distribution of its profits.

REITs tend to invest mostly in commercial property but can also hold residential property.

How do I know if a REIT is right for me?

A REIT may be the right option for you if you are looking for an indirect way of investing in the property market without having to buy a house or flat or become a landlord.

What are the advantages of investing in a REIT?

*To maintain REIT status, the company must meet certain conditions including paying investors 90% or more of its profits as dividends, so REITs can be a good income vehicle.

*Income profits and capital gains of the underlying assets are exempt from corporation tax. Because a REIT pays less corporation tax it may be able to return more profit to investors.

*Some companies invest in specialist property types, giving you access to markets that are normally hard to invest in.

What are the disadvantages?

REITs are not directly regulated by the Financial Conduct Authority (FCA), therefore you will not be protected by its rules. Your money will also not be protected by the Financial Services Compensation Scheme (FSCS) which will compensate £50,000 per person per firm.

According to property information service, Reita, recent performance has been much poorer than for direct property, and shares in REITs have also continued to trade at a discount to net asset value, despite the removal of the tax inefficiencies that were a major explanation for the discount.

How are REITs priced?

As REITs are publicly traded, their prices will go up and down depending on demand from the market, like a normal share.

Are REITs ISA eligible?

Yes.

Where can I purchase a REIT share?

Shares in REITs can be purchased through a stockbroker or share trading platform. Most financial advisers are able to advise on REITs, although are unable to purchase them on behalf of clients.

Are there other ways to invest indirectly in real estate?

Other ways to indirectly invest in property include property funds, property unit trusts and OEICs, property investment trusts and property authorised investment funds (PAIFs).

For more on investing in the housing market, click here.

 

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