REIT Real Estate Investment Trusts - your comprehensive UK guide

Why are Real Estate Investment Trusts good investments

REITs are worth hundreds of billions of pounds in other countries where large numbers of investors appreciate the high yield and steady stream of income. They give individual retail investors access to a diversified portfolio of property without the risks and administrative burden of direct ownership. The chancellor highlighted REITs as a suitable investment for people wanting to place property assets in their Self-invested personal pensions (SIPPs). He said that REITs were more suitable as pension investments because they were less risky than investment in a single property.

There are two broad reasons for conisdering REITs as part of your investment strategy:

Portfolio Diversification

REITs allow individual investors to access property in a relatively straightforward manner. Currently small investors have very limited access to property investment being mainly restricted to buy-to-let residential property with no exposure to commercial properties.

REITs will open up opportunity for small to be invested in the commercial as well as the residential secor and to diversify across different geographical locations. You could thnk of REITs as mutual funds that hold property rather than financial assets. REITs and other combined vehicles allow the benefits of property investment to be widely accessed.

Tax Treatment

Whilst it is important not to let the tax tail wag the investment dog i.e. tax efficiency should not be your main reason for investing, REITs significantly reduce and even eliminate income taxes on earnings that would otherwise be levied at the corporate level. Qualified income passes through the REIT to shareholders. Taxable investors are liable for taxes on dividends and capital gains received.

At present double taxation is a major problem for investors in property companies. Shareholders in property companies are taxed twice, once as shareholders and once as a property company. While the property company pays taxes on profits and capital gains, shareholders pay tax again. REITs would effectively remove the property companies requirement to pay taxes provided 95% of the income is passed directly through to shareholders. From a government perspective, however, there is likely to be a loss of revenue which it will offset by introducing a one-off tax to recoup lost Capital Gains Tax from companies switching to REITs. The level of that one off tax is unlikely to be revealed until the March 2006 budget. It is the level of that tax that will determine the number of property companies that switch to the UK-REIT structure and thus determine the strength of the sector.