Real estate investment trust (REIT)

A real estate investment trust (Reit) is an investment company that owns and leases out property.

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.

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).

Recommended

Is it OK to buy Scottish Mortgage investment trust again?
Investment trusts

Is it OK to buy Scottish Mortgage investment trust again?

Scottish Mortgage investment was hit hard by the tech-stock crash, and it is still being buffeted by headwinds. Should new investors wait for those to…
5 Jul 2022
The income investor’s dilemma
Income investing

The income investor’s dilemma

Pay attention to dividend growth as well as initial yield when picking income trusts, says Max King.
4 Jul 2022
A Europe-focused investment trust that’s back on form
Investment trusts

A Europe-focused investment trust that’s back on form

Alex Darwall’s European Opportunities investment trust deserves another look after a difficult spell, says Max King.
28 Jun 2022
The ten investment trusts with the highest dividend yields
Investment trusts

The ten investment trusts with the highest dividend yields

Investment trusts are one of the best ways to participate in the stockmarket, and the way they are structured means they can maintain their dividends …
23 Jun 2022

Most Popular

Is inflation about to drop as recession takes hold?
UK Economy

Is inflation about to drop as recession takes hold?

Central banks are raising interest rates in an attempt to curb soaring inflation. But will that push the economy into recession? John Stepek looks at …
5 Jul 2022
Ray Dalio’s shrewd $10bn bet on the collapse of European stocks
European stockmarkets

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks

Ray Dalio’s Bridgewater hedge fund is putting its money on a collapse in European stocks. It’s likely to pay off, says Matthew Lynn.
3 Jul 2022
Is it OK to buy Scottish Mortgage investment trust again?
Investment trusts

Is it OK to buy Scottish Mortgage investment trust again?

Scottish Mortgage investment was hit hard by the tech-stock crash, and it is still being buffeted by headwinds. Should new investors wait for those to…
5 Jul 2022