Real Estate Investment Trusts (REITs): Definition, Guide and Examples

Property has been the alternative investment of choice for many with a strong long-term growth profile and the added attraction of healthy rental income. But buying property directly (buying the bricks and mortar) comes with significant risks – lack of liquidity, lack of diversification due to significant capital needs, the hassle of maintenance, tenancy management, insurance, regulation. This is where Real Estate Investment Trusts (REITs) come in. They have revolutionised the way individuals and institutions invest in real estate, making property investment more accessible and liquid than ever before. Since their inception in the 1960s, REITs have grown to become a significant component of many investment portfolios, offering investors the opportunity to benefit from real estate returns without directly owning physical properties.

Article Contents

Key Takeaways

Topic Key Takeaways
Definition of REITs A REIT is (in most jurisdictions) a company that owns, operates, or finances income-generating real estate. Introduced to the market in the 1960s (US) and in 2007 (UK) to make property investment accessible.
REIT Criteria To qualify as a REIT, the company must invest 75% in real estate, derive 75% income from real estate, pay out 90% of taxable income as dividends, have 100+ shareholders, and avoid concentrated ownership. In return, the REIT has special tax rules that make it attractive. For example, in the UK REITs are exempt from corporation tax altogether! The return is taxed on the investor when income is distributed. That’s why at least 90% has to be distributed.
Types of REITs Equity REITs (income from rent), Mortgage REITs (income from interest), and Hybrid REITs (combine equity and debt investments).
REITs by Trading Status REITs are typically not set up as trusts, but rather they are regular Publicly Traded companies, listed on the stock market, thus providing high liquidity. They can be Public Non-traded, and these will be less volatile (no stock market risk) but also less liquid. They can also be Private (limited to institutional investors, least liquid).
Investment Methods Direct investment in REIT stocks (shares on the stock market), REIT mutual funds (a fund that buys shares in a number of REITs) , REIT ETFs (extra layer of liquidity as the ETF shares are traded on the stock market as well as the underlying REIT shares) , and private REITs (for accredited investors).
Benefits of REITs Professional management, income generation, tax advantages for the REIT to avoid double-taxation, instant diversification for investors, and access to capital markets for fund raising.
Dividend Characteristics Although there are some differences in different markets, one common theme is the mandatory 90% income distribution. Typically, higher yields than traditional stocks, paid quarterly usually, and can include ordinary rental income, capital gains, and return of capital. Whether return is generated by income or capital gains, the investors’ income as dividends will be taxed as income tax.
Risks of Investing in REITs Includes market risk for publicly traded REITs, property-specific risks (geography, property type), management risk, and liquidity risks. However, diversification and tradability reduce the market and liquidity risk compared to direct property investment.
Performance Evaluation Metrics Key metrics include Funds from Operations (FFO), Adjusted FFO (AFFO), Net Operating Income (NOI), occupancy rates, rental growth, and management strategies.
Tax Implications No corporation tax for the REIT itself; dividends taxed as ordinary income for investors. Different tax treatments apply based on accounts and jurisdictions

What is a REIT?

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate properties. REITs were established by the U.S. Congress in 1960 to provide individual investors access to real estate investment opportunities without the need for direct property ownership. Since then, many countries have adopted similar structures, including the United Kingdom, which introduced REITs in 2007. British Land and Land Securities are the most well-known in the UK market.

To qualify as a REIT, companies must meet specific criteria:

  1. Invest at least 75% of total assets in real estate
  2. Derive at least 75% of gross income from real estate-related sources, which includes mortgage loans
  3. Pay a minimum of 90% of taxable income as shareholder dividends
  4. Have at least 100 shareholders (not be a ‘close’ company with directors being the only shareholders
  5. Have no more than 50% of shares held by five or fewer individuals
  6. Once qualified, the REIT benefits from special tax exemptions that make it a very attractive investment vehicle for those wishing to invest in property indirectly (buying shares in the REIT)

How do REITs work?

REITs operate on a relatively straightforward business model. They acquire and manage real estate properties, collect rental income, and distribute the majority of their earnings to shareholders in the form of dividends. The REIT structure provides several advantages:

  1. Professional Management
    • Experienced teams handle property acquisition, management, and disposition
    • Market analysis and strategic decision-making
    • Risk management and portfolio diversification
  2. Income Generation
    • Regular rental income from properties
    • Additional revenue from property appreciation
    • Mandatory dividend distribution requirements
  3. REIT Structure Benefits
    • Tax advantages through special REIT status
    • Economies of scale in property management
    • Access to capital markets for funding

Types of REITs

REITs can be categorized in several ways, primarily by their investment focus and trading status:

  1. Equity REITs
    • Own and manage income-producing properties
    • Generate revenue primarily through rental income
    • Usually focus on specific property types (office, retail, residential)
  2. Mortgage REITs
    • Provide real estate financing through mortgages and mortgage-backed securities
    • Generate income through interest payments
    • May focus on residential or commercial mortgages
  3. Hybrid REITs
    • Combine both property ownership and mortgage financing
    • Offer diversification across both equity and debt investments

Categorising them by Trading Status:

  1. Publicly Traded REITs
    • Listed on major stock exchanges
    • Highly liquid investments (but not the underlying property!)
    • Subject to market volatility
  2. Public Non-Traded REITs
    • Registered with securities regulators but not listed on exchanges
    • Less liquid than publicly traded REITs
    • May offer more stable valuations
  3. Private REITs
    • Not registered with securities regulators
    • Generally limited to institutional investors
    • Typically less liquid than public REITs

How to Invest in REITs

Investing in REITs can be accomplished through several methods:

  1. Direct Investment in REIT Stocks
    • Purchase shares through a broker
    • Trade on major exchanges
    • Requires research and analysis of individual REITs (research such as type of property / mortgage / geographical dispersion, diversification of the underlying property holdings)
  2. REIT Mutual Funds
    • Professional management
    • Diversification across multiple REITs
    • Lower individual research requirements
  3. REIT ETFs (like a mutual fund but traded on the stock market for additional liquidity)
    • Trade like stocks
    • Often track REIT indices
    • Generally lower expenses than mutual funds
    • REIT ETFs offer more diversification as they invest in several REITs which are themselves holding diversified property holdings. Through the EFT investors can reduced concentration risk (e.g. avoiding overexposure through concentration by just investing in one REIT)
  4. Private REIT Investment
    • Usually requires accredited investor status
    • Higher minimum investment requirements
    • Potentially higher returns but also higher risks

Understanding REIT Dividends

REIT dividends are a crucial component of their appeal to investors:

  1. Dividend Requirements
    • Must distribute at least 90% of taxable income
    • Often yield higher than traditional stocks (because at least 90% of generated income must be distributed which means rental income ‘passes through’ the REIT to the end investor)
    • Generally paid quarterly
  2. Types of Distributions
    • Ordinary income dividends
    • Capital gains distributions
    • Return of capital
  3. Dividend Growth
    • Potential for increasing dividends over time
    • Linked to property income growth
    • Affected by market conditions and property performance

Risks and Considerations in REIT Investing

While REITs offer attractive benefits, they also come with specific risks:

  1. Market Risks
    • Interest rate sensitivity
    • Real estate market cycles – REIT shares fell heavily in 2008/2009 during the financial crisis (70–80% in some cases) as investors priced in property value falls, debt risk, and rights issues.
      • Example: British Land’s share price fell from over 1,600p (2007) to around 300p (early 2009)
      • Note that the market risk can be exacerbated by the leverage of the REIT. Commercial property values in the crash fell by 40–45% but note the fall in British Land’s share price. Before the crash, British Land’s portfolio was typically leveraged at around 45% loan-to-value.
    • Economic conditions impact
  2. Property-Specific Risks
    • Tenant defaults
    • Property maintenance costs
    • Location-specific challenges
  3. Management Risks
    • Strategic decisions
    • Acquisition choices
    • Debt management
  4. Liquidity Risks
    • Varies by REIT type
    • Non-traded REITs less liquid
    • Market conditions affect tradability

Tax Implications of REIT Investments

Understanding the tax treatment of REIT investments is crucial:

  1. REIT-Level Taxation
    • REITs generally pay no corporate tax
    • Must meet specific requirements to maintain tax status
    • Pass-through entity structure with more than 90% of income having to be distributed to investors
  2. Investor-Level Taxation
    • Dividends typically taxed as ordinary income
    • Capital gains distributions taxed at appropriate rates
  3. Tax Considerations
    • Different treatment in ISAs and SIPPs (these are UK-specific tax-free investments and so are protected from tax in the UK)
    • International tax implications
    • If unsure, any investor (especially investing overseas) needs to seek professional tax advice

Evaluating REIT Performance

Key metrics for analysing REIT performance include:

  1. Financial Metrics
    • Funds from Operations (FFO)
    • Adjusted Funds from Operations (AFFO)
    • Net Operating Income (NOI)
  2. Property Metrics
    • Occupancy rates
    • Rental growth
    • Property values
  3. Management Effectiveness
    • Acquisition strategy
    • Cost control
    • Capital structure

Real Estate Investment Trusts Case Studies and Examples

Examples of successful REITs and their strategies:

  1. British Land (BLND.L)
    • Focus on London office and retail properties
    • Strategic portfolio management
    • Successful development projects
  2. Land Securities Group (LAND.L)
    • Diverse property portfolio
    • Strong dividend history
    • Sustainable development focus
  3. Segro (SGRO.L)
    • Industrial and logistics properties
    • European expansion
    • E-commerce driven growth

Common Interview Questions regarding REITs

  1. Basic Understanding
    • “What is a REIT and how does it work?”
    • “Explain the different types of REITs”
    • “What are the key requirements for REIT qualification?”
  2. Analysis and Metrics
    • “How do you evaluate REIT performance?”
    • “How do interest rates affect REITs?”
    • “What is FFO and why is it important?”
    • Note: FFO = Net income (under IFRS/GAAP) + Depreciation & Amortisation – Gains on property salesSome REITs (including the UK players) report a similar measure called EPRA Earnings (European Public Real Estate Association), which is basically adjusted FFO.
      Why adjust Net income?

      • In accounting, property values are revalued every year. In a volatile market (like 2008–09), that creates huge swings in reported net income (large unrealised losses when valuations fall).
      • Those valuation changes aren’t cash.
      • Depreciation of investment properties is also an accounting charge that doesn’t reflect real cash outflow (property often appreciates long-term).

      👉 FFO strips these out to show the underlying, recurring cash profit from rent.

  3. Investment Strategy
    • “What factors should be considered when investing in REITs?”
    • “How do REITs fit into a diversified portfolio?”
    • “What are the advantages and disadvantages of REIT investing?”

REITs represent a vital component of the modern investment landscape, offering investors access to real estate returns through a liquid, professionally managed vehicle. Understanding their structure, operations, and various considerations is essential for making informed investment decisions. Whether as part of a diversified portfolio or a focused real estate investment strategy, REITs continue to provide valuable opportunities for both income and capital appreciation.

Develop Core Competencies for Analysing Financial Statements and Data

REIT FAQs

A REIT in the UK is a company that owns, operates, or finances income-generating real estate properties. To qualify as a REIT in the UK, companies must invest at least 75% of their assets in real estate, distribute 90% of taxable income as dividends, and meet specific shareholder requirements. The UK introduced REITs in 2007 to make property investment more accessible to individual investors..

You can invest in UK REITs through several methods: buying shares of publicly traded REITs directly through a broker on the London Stock Exchange, investing in REIT mutual funds, purchasing REIT ETFs, or participating in private REITs (though these typically require accredited investor status). Popular UK REITs include British Land, Land Securities Group, and Segro.

REIT owners make money through two primary channels: regular dividend payments and capital appreciation. REITs generate income from collecting rents on their properties and potentially from property value increases. As REITs must distribute at least 90% of their taxable income to shareholders, they typically offer higher dividend yields compared to traditional stocks.

REITs typically pay out dividends quarterly. These payments can come in three forms: ordinary income dividends (from rental income), capital gains distributions (from property sales), and return of capital. The majority of REIT dividends are taxed as ordinary income, though tax treatment can vary depending on whether the investment is held in tax-advantaged accounts like ISAs or SIPPs.
By |2025-09-01T09:23:16+00:00September 1st, 2025|Accounting|Comments Off on Real Estate Investment Trusts (REITs): Definition, Guide and Examples

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