Real estate investment trust
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A Real Estate Investment Trust or REIT (rhymes with treat) is a tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes. 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.
History
The United States Congress created REITs in 1960 [link] to give anyone and everyone the ability to invest in large-scale commercial properties. Subsequently, REITs were introduced in the Netherlands and Australia as a means to invest in a portfolio of residential and commercial property.United States REITs
In the U.S., REITs generally pay little or no federal income tax, but are subject to a number of special requirements set forth in the Internal Revenue Code, one of which is the requirement to annually distribute at least 90% of its taxable income in the form of dividends to its shareholders.In recent practice, many REITs distribute all of or even more than their current earnings, often resulting in dividend yields comparable to bond yields. If an investment company such as a REIT distributes more than its taxable income, the excess distribution is considered "return of capital" for tax purposes (taxed as a capital transaction, rather than regular income). The distribution requirement may hamper a REIT's ability to retain earnings and generate growth from internal resources. This and other restrictions imposed by the Internal Revenue Code generally limit a REIT's suitability for growth-oriented investors. However, other considerations may result in potential for stock price appreciation, such as improvements in the REITs underlying leasing markets, changes in interest rates or increasing demand for REIT stocks.
Qualification
In order to qualify for the advantages of being a pass-through entity for corporation tax, a REIT must comply with the following Internal Revenue Code provisions:
- Structured as corporation, business trust, or similar association
- Managed by a board of directors or trustees
- Shares need to be fully transferable
- Minimum of 100 shareholders
- Pays dividends of at least 90% of 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
- At least 75% of total investment assets must be in real estate
- Derive at least 75% of gross income from rents or mortgage interest
- Have no more than 20% of its assets consist of stocks in taxable REIT subsidiaries. [www.reitnet.com]
United Kingdom REITs
The legislation laying out the rules for UK REITs is due to be enacted in the Finance Act 2006 and will come into effect in January 2007.UK REITS will have to distribute 95% of income. They must be a close-ended investment trust and be UK resident and publicly listed on a stock exchange recognized by the Financial Services Authority.
Japan REITs
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. 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 REITs as a way to increase investment in the real estate market, although notable increases in asset values has not yet been realized.
German REITs
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 resistance to these plans, especially by the social demcoratic party. 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.
REITs
- Chartwell Seniors Housing REIT
- Equity Office
- General Growth Properties
- Glimcher Realty Trust
- Mack-Cali Realty Corporation
- Host Hotels & Resorts
- Mills Corporation
- Pan Pacific Retail Properties
- Parkway Properties, Inc.
- Simon Property Group
- The Link REIT
- Vornado Realty Trust
- BioMed Realty Trust
- JER Investors Trust
- KKR Financial
- S L Green
- Prologis
- RAIT Investment Trust
- Crystal River Capital
- Government Properties Trust
- American Financial Realty
- Realty Income Corporation
See also
External links
- [whpinvest.com] Newsletter for REIT and other high dividend investors
- [National Association of Real Estate Trusts] a U.S. organisation.
- [UK REITs] The UK version
- [Status on REITs in Germany](in English)
- [A Call for the Creation of Socially Responsible Real Estate Investment Product]
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