A real estate investment trust (Reit) is a company that owns and leases out property. The exact rules governing how Reits work vary in different countries, but they must usually pay out most of their property income to shareholders each year (a minimum of 90% is typical). They may be allowed to develop properties as well as owning and leasing them, but rent must make up the majority of their income. They may also be subject to other restrictions, such as caps on leverage (the amount they can borrow against their assets).
The compensation for these restrictions is that Reits pay no corporation tax on eligible income and capital gains – unlike traditional property companies, which must pay corporation tax. Instead, shareholders will pay income tax at the relevant rate on the income distributed to them each year. This makes Reits more tax efficient than most other property investment vehicles, because it avoids income being taxed twice.
Reits typically focus on one or two sectors, such as offices, shopping malls or warehouses, rather than covering the entire property market. The range of available Reits also includes specialists in relatively niche sectors such as self-storage units or data-centre facilities. Investors can easily build a diversified portfolio of commercial property by selecting Reits from different sectors and different countries, or by buying an exchange traded fund (ETF) that tracks a broad index of property companies.
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The share price of Reits can be volatile (in common with most property-related stocks), especially during periods of crisis when they may be more volatile than the wider stockmarket. However, Reits are much more liquid than direct investment in property or even open-ended property funds (which may struggle to sell assets quickly and can be forced to suspend redemptions if lots of investors want to exit at the same time).
