YES, you can boost your investment yield with Real Estate Investment Trusts.
What are Real Estate Investment Trusts ?
REITs are essentially companies or groups of companies that manage a portfolio of real estate to earn profits for shareholders. Their special tax status means that they pay no corporation tax on the profits of their rental business, but they need to comply with a number of conditions set out in tax law.
KEY FACTS ABOUT REITS
- REITs must pay out 90% of their property income to shareholders every year.
- Dividends from REITs are treated as property income to the investor, and are taxed accordingly. These dividends are subject to a withholding tax at basic rate income tax, except for certain classes of investors who can register to receive gross rather than net payments. These include charities, UK companies, and pension funds.
- REIT shares can be held in NISAs and Child Trust Funds (CTFs), and the managers of these can receive gross distributions, making these highly tax efficient.
- REITs must be primarily engaged in property investment, rather than in development or other non-property related activities.
- As REITs are all listed property companies, investments in them are generally very liquid.
The government introduced legislation allowing property companies to convert to REITs. The government does not introduce tax breaks without a reason and they want to encourage members of the public to invest in large commercial property projects as this type of project generally provides employment opportunities. Large real estate projects that involve REIT’s include office complexes, hospitals, shopping centres and other large commercial projects
It is best to diversify your holdings in REIT’s and spread your investment in property in different property sectors and locations.
Large commercial property investments have financially strong tenants who are able to enter into long term lease agreements. The long leases provide a consistent and often high level of income.
Our View
As with all investment decisions you need to consider whether investing in REIT’s is suitable for you.
That depends on a variety of factors for example if you are over 50 and looking forward to retirement you will need to adjust your investment strategy AND include investments that provide consistent high levels of income. REIT’s provide this because of their high yield and capital uplift over time.
We believe that investing in REIT is very useful for clients in this category and we are currently obtaining yields of around 6% for clients.
AS REIT’s are a form of investment trust AND there is a high demand for investments that provide high levels of income then they will often stand at a premium to net asset value. That means that the price of the shares is higher than the net asset value of the assets they hold.
So good timing is essential, if possible therefore time your investment into a REIT when the premium is low.
Our research has recently unearthed a first class REIT that is at an early stage – so we have recommended our clients get invested before it achieves a premium on the price of its shares.
If you have Corporate Bond investments you should consider diversifying some of these into REIT’s.
