6127BUEG: VALUATION THEORY &

INVESTMENT

Session 2 [WK 4]
Securitization of Real Estate - REITs

Structure of session
Real estate investment trusts
Brief historical background
UK REITs
Advantages of UK REITs
Features of UK REITs
Examples of UK REITs
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Real estate investment trusts (REITs)

A REIT is a company or group that invests in real estate:
It is, thus, a vehicle for investing in real estate, which carries
certain tax liability advantages

Even though such an investment vehicle is referred to as a

trust, it is just like any other private investment company:
The only substantial difference is that once registered as a REIT,
companies will benefit from various tax breaks and these tax
advantages are passed on to the REIT investor

It is securitization of real estate where individuals can purchase

shares in the REIT and in return are paid dividends without
directly owning real estate
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Brief historical background of REITs

The genesis of REIT as an investment vehicle dates back to
1960, when the concept was introduced by the US Congress to
encourage public investment in the US commercial real estate
market
The US REIT has been revised & developed into the desirable
tax efficient real estate investment vehicle that it is today
REIT-like structures have become a truly global phenomenon
trading in countries like US, Canada, New Zealand, Australia,
Japan, Singapore, Hong Kong, Malaysia, Thailand, South
Korea, Taiwan, Netherlands, Belgium, Greece and France
Introduced in the UK 5 years ago
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UK REITs
Traditionally, for the private investor in the UK, the ways of
investing in real estate have been:
Purchase or development for holding
Purchase or development for sale [buy-to-sell]
Purchase or development for letting [buy-to-let]

But investing in such real estate via the above options require
huge capital
For those who do not have the capital outlay required or are
nervous about taking mortgage, or maybe are not sure where
and when to purchase, for example, a viable buy-to-let property
or buy-to-sell property, there have been virtually no alternatives
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UK REITs (cont)
UK-REITs were, therefore, introduced in January 2007 following
the enactment of the Finance Act 2006 to encourage more people
to invest in a greater diversification of real estate previously
unavailable to them
The regime provides an alternative to offshore structures

The objective is to provide an attractive, tax-efficient, UK vehicle

for operating a property rental business irrespective of whether
the business involves UK or non-UK property
REITs allow smaller investors to buy into real estate without
having to physically own particular real properties
The small capital outlay requirements in REITs give anyone the
chance to get a slice of the real estate pie

Advantages of UK REITs
(1) A REIT enjoys a measure of protection from corporation tax
in return for an obligation to distribute a significant proportion of
profits to shareholders - at least 90% of profits must be distributed
UK-REITs ensure tax transparency by exempting from tax all
property income and capital gains at the company level
Capital gains need not be distributed but if they are, their tax
treatment is the same as for income distributions

Before REITs were launched in the UK, quoted real estate

companies suffered from a type of double taxation
First, companies had to pay corporation tax and secondly,
investors in the company had to pay tax on their share dividends
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Advantages of UK REITs (cont)

This put real estate companies at a disadvantage as compared
with investing directly in for e.g. a buy-to-let real estate where
there was only one taxation charge:
That is, investors paying tax on rental income

(2) Shareholders are taxed as though they had received any

distribution out of the exempt business as property income
(3) Based on global evidence, there is normally a reduction in
gearing levels of REITs, which enhances investor yield

Advantages of UK REITs (cont)

(4) Liquidity & diversification
Investors in REITs are able to buy and sell their shares
easily [thereby having the benefit of liquidity] & invest in a
diverse variety of properties, as opposed to putting all their
cash into, say, one buy-to-let property
(5) Lower transaction costs compared to buying real estate
directly
E.g., SDLT on direct non-residential or mixed used real estate
is up to 4% [up to 15% for residential] depending on the market
value of the real estate, whereas buying shares in a UK REIT is
only subject to stamp duty of 0.5%
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Advantages of UK REITs (cont)

(6) There is access to real estate investment in a variety of
sectors and geographical locations as REITs can own nonUK real estate
(7) REITs allow investors to buy relatively inexpensive easily
tradable units
They no longer have to buy an entire property [which requires
huge capital outlay] to get a handsome return on their capital
outlay
There is access to real estate investment at a minimal capital
outlay
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Features of UK REITs
(1) Listed status - every UK REIT must be listed on a
recognised stock exchange (e.g. The London Stock Exchange)
and is, therefore, subject to relevant listing rules and
regulations
No principal shareholder should own more than 10%

(2) Companies/groups wishing to enter the regime must pay an

entry charge at 2% on the gross value of its property rental
business assets
(3) At least, 75% of UK REITs total profits and total asset value
must relate to its real estate rental business to ensure that it is
geared towards real estate investment
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Features (cont)
(4) Residence - the company must be resident in the UK only,
either by virtue of its place of incorporation or because its
central management and control is in the UK
(5) A REIT must hold at least 3 landed properties through out
its accounting periods and the value of a single property must
not exceed 40% of the combined value of all of the property
business
(6) REITS can develop properties and benefit from the REIT tax
exemption providing:
Development is undertaken for rental business and
properties are retained for three years after completion
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Features (cont)
(7) Debt financing - a charge may be imposed where, for an
accounting period, the company has a very high level of
gearing [over 80%].
(8) Close company status - The company must not be a close
company
A close company is one that is broadly under the control of the
directors or five or fewer shareholders
A company would generally not be close if it is controlled by
more than five persons or more than 35% of its shares are in
public hands
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Examples of UK REITs
Company
British Land
Brixton
Derwent London
Great Portland Estates
Hammerson
Land Securities
Liberty International
Local Shopping REIT
McKay Securities
Mucklow (A & J) Group
Investment Trust Plc

Sector Focus
Diversified
Industrial
Offices
Offices
Diversified
Diversified
Retail
Retail
Offices
Industrial & Offices
Asset Managers
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Summary of session
The following have been covered in this session:
Real estate investment trusts
Brief historical background
UK REITs
Features of UK REITs
Advantages of UK REITs
Examples of UK REITs

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