Real Estate Investment Trust

A real estate investment trust or REIT is a financial product that is traded like a stock on the major stock exchanges and invests in real estate market directly, either through equities or mortgages.

The rationale behind investing in REIT is reducing or eliminating corporate tax. In return, REITs are obliged to dispense 90% of their taxable income into the hands of investors.

The REIT structure was intended to create a real estate investment structure similar to the structure like mutual funds –which offer for investment in stocks.

REITs can be sold both publicly or privately. Public REITs are also listed on public stock exchanges.

REITs can be categorized as equity, mortgage, or a hybrid.

Statistics that help in evaluating REIT are net asset value (NAV), funds from operations (FFO), adjusted funds from operations (AFFO) and cash available for distribution (CAD).

From 2008 to 2011, REITs had to face lots of challenges from both  stalling United States economy and the aftereffects of subprime mortgage and financial crisis, which resulted in share values drop 40 to 70 percent in some cases.


The origination of real estate investment trusts dates back to 1880s at a time when investors could avoid double taxation.  Then later in the 1930s, this tax benefit was abolished, as a result, investors were made to pay “double tax.”  In 1960, President Eisenhower signed the REIT tax provision contained in the Cigar Tax Excise Tax Extension.

REIT By Countries


The REIT concept was introduced in Australia in 1971. General Property Trust was the first Australian real estate investment trust (LPT) which was listed on the Australian stock exchanges now called as Australian Securities Exchange.  Until March 2008, REITs listed on an exchange were referred as Listed Property Trusts (LPTs), which were different from private REITs known as Unlisted Property Trusts. Later publicly traded real estate funds were renamed Australian Real Estate Investment Trusts (A-REITs) in line with international practice.

By 2011, there were more than 70 A-REITs listed on the ASX, having market capitalization in excess of A$100bn.

Australia is fast becoming as world’s largest REITs market, just behind the United States. Over 12 percent of global listed property trusts are traded on the ASX.


REITs were launched in Brazil in 1993 by the law 8668/93 and to begin with, they were ruled by the instruction 205/94 and, nowadays, by instruction 472/08 from CVM (Comissao de Valores Mobiliarios – which is the Brazilian equivalent of SEC).

In Brazil they are known as “FII”s or “Fundos de Investimento Imobiliario”.  Since 2006, dividends earned on FII are tax free for personal investors (not companies), but it is applicable on those funds which have minimum 50 investors and that are publicly traded in the stock market.


REITs in Canada were introduced in 1993. Canadian REITs are required to be organized as trusts and are not taxed if they allocate their net taxable income to shareholders. REITs have been exempted from the income trust tax legislation passed in the 2007 budget by the Conservative government.

Most Canadian REITs have limited liability. On December 16, 2010, the Department of Finance suggested changes to the rules defining “Qualifying REITs” for Canadian tax purposes. Accordingly, “Qualifying REITs” are excluded from taxation. It has the new entity-level, “specified investment flow-through” (SIFT) that tax  all publicly traded income trusts and partnerships trusts as of January 1, 2011.


Finnish REITs were launched in 2010, when ‘the tax exemption law’ (Laki eraiden asuntojen vuokraustoimintaa harjoittavien osakeyhtiöiden verohuojennuksesta, 299/2009) was legislated by the Finnish parliament. Along with the ‘Law on Real Estate Funds’ (Kiinteistorahastolaki, 1173/1997) it facilitates the trading of tax efficient residential REITs.


  • REITs need to be created as a public listed company (julkinen osakeyhtio, Oyj) for this exact purpose. The minimum equity at the time of introducing REIT should be 5M€ and it has to be distributed over 5 separate investors.
  • Minimum holding period has to be 5 years.
  • A minimum 80% of its assets have to be invested in residential real-estate.
  • At minimum 80% of the REIT’s gross revenues must come from residential rental income.
  • At minimum 90% of the REIT’s taxable income, (which does not include unrealized capital gains), has to be distributed to its shareholders through dividends.
  • The corporation does not have to pay the income-tax-, but the shareholders will have to pay individual income tax on the dividends.
  • Biggest individual shareholder may own less than 10% of company shares (max. 30% till the end of 2013).


French REITs are known as SIIC. Gecina is the biggest French SIIC in terms of market capitalization and the second largest publicly traded property company in France following Fonciere des Regions and Icade, which is having third highest asset value among European REITs.


Germany is also in the process to set up German REITs (short, G-REITs) aimed at creating a new type of real estate investment vehicle.  The Government’s concern is that if it fails to introduce REITs in Germany, the result will be a significant loss of investment capital to other countries. Nevertheless there still is political opposition to these plans, particularly by the social democratic party (‘SPD’).

Hong Kong

REITs have been traded in Hong Kong since 2005, when The Link REIT was introduced by the Hong Kong Housing Authority on behalf of the Government. Between 2005 and July 2007, 7 REITs have been listed; nevertheless, most of the REITs including Sunlight REIT have not been successful due to low yield. Apart from The Link and Regal Real Estate Investment Trust, share prices of all remaining REITs are considerably below IPO price. Hong Kong issuers’ extensive use of financial engineering such as interest rate swaps to enhance initial yields has also been blamed for having reduced investors’ interest.


Japan was the first Asian country to establish REIT in December 2001. Traded on the Tokyo Stock Exchange, majority of service providers of the J-REITs are Japanese real estate companies, Japanese conglomerates and global investment banks.

Established as an investment company under the LITIC, A J-REIT (a listed real estate investment trust) is highly regulated under the Law concerning Investment Trusts and Investment Companies (the “LITIC”)

Besides, REITs, Japanese law also allows the development of a parallel system -special purpose companies- which can be used for the securitization of some properties on the private placement basis.


Normally called as S-REITs, there are at present 20 REITs listed on the SGX, the first one to be launched was Capita Mall Trust, in July 2002. They offer a range of property sectors which include: retail, office, industrial, hospitality and residential. S-REITs hold a number of properties internationally including Japan, China, Indonesia and Hong Kong, alongside local properties.

S-REITs are regulated as Collective Investment Schemes under the Monetary Authority of Singapore’s Code on Collective Investment Schemes or alternatively as Business Trusts.

United Kingdom

The legislation with regards to rules and regulations of REITs in the United Kingdom were introduced in the Finance Act 2006 and came into effect in January 2007 when nine UK based property companies changed themselves to REITs. These companies included five FTSE 100 members at that time: British Land, Hammerson, Land Securities, Liberty International and Slough Estates (now called as “SEGRO”). The other four companies included Brixton (now referred to as “SEGRO”), Great Portland Estates, Primary Health Properties and Workspace Group.

Under the British law, REITs are required to distribute 90% of their income. The prerequisite is: It must be a close-ended investment trust and be UK resident and publicly listed on a stock exchange recognized by the Financial Services Authority.

To support the establishment of REITs in the UK, the REITs and Quoted Property Group was created by a number of commercial property and financial services companies. Some other key establishments involved are the London Stock Exchange the British Property Federation and Reita. The Reita campaign was started on 16 August 2006 by the REITs and Quoted Property Group, aimed at providing a source of information on REITs, quoted property and related investments funds. Reita’s objective is to bring awareness and understanding of REITs and investment in quoted property companies. It does this mainly with the help of its portal, disseminating knowledge, education and tools for financial advisers and investors.

United States

In the United States, a REIT is an entity that owns, and in practically in all cases operates, income-producing real estate. Some REITs, though, finance real estate. In order to be called as a REIT, a company must distribute minimum 90 percent of its taxable income to shareholders every year in the form of dividends.

In order to be eligible for the benefits of being a pass-through entity for U.S. corporate income tax, a REIT should:

  • Be formed as a corporation, trust, or association
  • Be administered by a board of directors or trustees
  • Have transferable shares or transferable certificates of interest
  • Or else be taxable as a domestic company
  • Not be a financial establishment or an insurance corporation
  • Be mutually owned by 100 persons or more
  • Have 95 percent of its income generated from dividends, interest, and property income
  • Pay dividends of at minimum 90% of the REIT’s taxable income
  • Have no more than 50% of the shares held by five or fewer individuals in the last half of each taxable year (5/50 rule)
  • Have 75% of its total assets invested in real estate
  • Generate at least 75% of its gross income from rents or mortgage interest
  • Invest at least 20% of its assets in taxable REIT subsidiaries.

Since U.S. REITs have access to corporate-level debt and equity that typical real estate owners cannot access, they have a favorable capital structure. These trusts are able to use this capital to finance tenant improvement costs and leasing commissions that less/under capitalized owners cannot afford.

Four leading REITs in New York City – S.L. Green, Vornado, Boston Properties, and Brookfield – have been proved to be highly successful, outperforming market averages in both occupancy and rents. This statics showing returns are analyzed in research conducted by Benjamin Polen and the results are  published by the Newman Real Estate Institute at Baruch College, CUNY.