Real Estate Investment Trusts

By:   Date: 16 December 2009

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A Real Estate Investment Trust (REIT) is a tax designation for a corporation investing in real estate reducing or eliminating corporate income taxes. Historically, REIT was created by the US Congress in 1960 and has seen a dramatic rise since 1992. Now the USA is said to have the largest and most well organized Real estate investment market in the whole world. Designed to provide a similar structure for investment in real estate as mutual funds create for investing in stocks, REIT is required to distribute 90% of their taxable income among the investors / shareholders according to Internal Revenue Code as in the USA. They are also required to invest at least 75% of their total assets in real estate and generate a similar amount of contribution from investments or mortgages on real property towards their gross income.

Like every other company, REIT can be publicly or privately held where publicly held REIT is listed on public stock exchanges. REIT, which is publicly traded, is required to file reports with the Securities and Exchange Commission (SEC) in the American system. The key statistics to observe in case of REIT are Net Asset Value (NAV), Adjusted Funds From Operations (AFFO) and Cash at Disposal (CAD).

REIT invests in different kinds of real estate including different real estate related assets like shopping malls, office buildings and hotels. The most common type of investment is equity real estate investment where the trust invests in or owns the real estate and collects rents for the investors. Mortgage REIT invests money in financial instruments secured by mortgages on real estate and Hybrid REIT are a combination of equity and mortgage real estate investment trusts.

Real Estate Investment Trust offers many advantages to people who do not have sufficient money to invest in real estate but desires to own a piece of property. Real estate investment trusts can offer you regular dividends when the trust uses your money to buy real estate and you may also gain when the share price of the company appreciates. As REIT have to doll out 90% of its taxable profit as dividend to its shareholders, they are usually labeled as high yield instruments similar to a small cap stock generating returns from dividends and share price appreciation.

Some of the well known REIT companies in the American context are the Washington Real Estate Investment Trust (WRIT) and the Pennsylvania Real Estate Investment Trust (PRIT). The USA also a national body of Real Estate Investment Trust companies known as the National Association of Real Estate Investment Trusts (NARIET). NARIET gives the most popular REIT index known as the NARIET Equity REIT index.

REIT is especially popular in Japan and Singapore other than in the USA. REIT is also well structured in Canada where they were first introduced in 1993. REIT was first listed in the Australian Stock Exchange (ASX) in as early as the 1970’s. The legislation for setting up REIT in the UK was enacted in the Finance Act of 2006 and came into effect in the beginning of 2007.

India is yet to allow to setting up of REIT and the Associated Chambers of Commerce and Industry (Assocham) has presently mooted the idea with the government to expand the property market and provide benefits to real estate investors.
 


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