Definition?
REITs, or real estate investment trusts, are a type of fund that invests in a group of properties that generate income, such as office buildings, shopping centres, and residential units, and generates income through rent, capital appreciation, and selling properties. They are publicly traded on stock exchanges, providing investors with the opportunity to invest with diversified real estate portfolios with the added benefit of liquidity.
What are the tax implications?
One of the main advantages of investing in a REIT is its tax-efficient structure. This type of investment is exempt from corporation tax on their rental income and capital gains tax on the sale of properties. Instead, they pay out around 90% of their taxable income to shareholders in dividends, which are subject to income tax.
What are the advantages and disadvantages?
Compared to owning physical real estate, investing in REITs offers several advantages. This type of investnent allows investors to diversify their real estate holdings across different types of properties and geographic locations, reducing risk. REITs are also traded via stock exchanges, making it easy to buy and sell shares, providing liquidity.
On the downside, backing REITs may offer lower returns compared to owning physical real estate, investors have less control with the properties, and the performance may be influenced by factors outside the investor’s control.
What is the process to buy shares of a REIT?
Your financial adviser may suggest REITs as part of your overall diversified portfolio. However, if you do not have an adviser you can buy shares through an online investment platform. To investors, investors will need to set up an account and provide the necessary documentation to comply with Know Your Customer (KYC) regulations. Once the account is set up, investors can search for what they want to back and place an order to buy shares.
What are the different types of REITs?
REITs come in a few forms, including mortgage, equity, and hybrid.
- Mortgage REITs earn their income from the difference between the interest earned on the mortgages they hold and the cost of borrowing the funds used to purchase the mortgages. They are more sensitive to interest rate changes and their yields may be volatile.
- Equity REITs are used to back income generating properties and generate income through rent, capital appreciation, and selling properties.
- Hybrid REITs combine the income-generating potential of equity-based REITs with the interest income potential of mortgage REITs. They can provide a more diversified investment portfolio, offering investors exposure to both property and mortgage markets by backing both.
What is the average dividend yield of REITs and how does it compare to other types of investments?
The average dividend yield varies depending on the type of REIT and the market conditions. In the UK, the average dividend yield of REITs is around 4%, which is higher than the yield of UK government bonds but lower than the yield of some high-yield equities. But they offer diversification and stability, making them a popular choice for income-seeking investors.
As well as this they offer a tax-efficient, diversified, and liquid way to back property without owning physical properties. However, they may offer lower returns compared to owning physical property and have less control over the properties owned by the REIT. With a little bit of understanding, investors can make a better decision about whether REITs align with their financial goals and risk tolerance.
