What Are REITs?
By Tam Ging Wien
What is a REIT?
A Real Estate Investment Trust (REIT) is a professionally managed entity that is setup as a collective investment scheme primarily to own, operate or finance income-producing assets across a diverse range of real estate sectors for the benefit of their shareholders (or unitholders).
Modelled after mutual funds or unit trusts, they pool together funds by initially issuing shares (or units) in the REITs to investors. These shares are individual units of ownership and represent an entitlement to the benefits in the REIT; for example, rights to the distribution of income and the rights to vote on policies. These pooled funds are directly used to invest in real estate or real estate backed assets with the objective of profiting both from the recurrent income and capital appreciation.
Income derived from the REIT’s investments are redistributed back to investors in proportion to their investment amount. The more shares (or units) they own, the larger their fractional entitlement in the REIT. In this way, REITs make it easier for investors to gain exposure to the long-term capital appreciation of the real estate sector while enjoying regular income through the distribution of dividends.
To qualify as a REIT, the entity needs to fulfil several conditions including (but not limited to):
In most jurisdictions, tax transparency laws dictate that a REIT must pay out at least 90% of their taxable income to shareholders in order to qualify and maintain their status as a pass-through entity and therefore be exempted from paying business tax. In this way, REITs allow investors to avoid double taxation, i.e. paying taxes both at the corporate and individual level.
In summary, REIT investors enjoy all the benefits of owning a tax efficient real estate asset with low capital outlay – without having to go out and source, buy, manage or finance the property themselves.
This dramatically reduces the barriers of real estate investing and enables investors to rapidly build up a portfolio of valuable real estate.