11 / 2006
Real Estate Investments Trusts (REITs) are joint stock companies that primarily derive their income from real estate i.e. ownership, operation, funding, or a mixture. They are free from corporate tax and pay out high parts of their profits.
There are national regulations on the minimum REIT income from and/or investment in real estate. USA, UK (planned): minimum 75 % of earnings, Canada: 90 % of earnings, Honkong: 90 per cent of fixed assets, Japan: 75 % of fixed assets, France: only earnings from rentals, Germany (planned): 75 %.
They are obliged to pay out most of their realised profits to their shareholders. 90 % in the US, 95 % planned for UK, 90 % planned for Germany, Australia: 100 %.
The companies are free from corporate taxes. Investors (banks, insurance companies, pension funds, individuals) may pay taxes on received dividends according to their individual income tax rate.
In most countries, REITs are listed public limited companies; however, they also exist as investment funds (“private REIT”, i.e. in the U.S.).
Because of the heavy risk that huge corporations build tax islands and control the market some countries have regulations on the minimum number of shareholders or the maximum shares of one shareholder. USA: At least 100 shareholders, the five largest shareholders must hold below 50 % together; Canada: At least 150 shareholders; Korea: max. 10 % of shares by one shareholder; Singapore: At least 500 shareholders; Britain: below 10 %; Germany (planned): share of one holder limited to 10 %, at least 15 % of the shares must be owned by small shareholders with max. 3 %; France, Belgium: no regulations, France for 2007 plans limits.
Who is interested in REITs?
Financial investors are interested in REITs because they perform high annual yields with limited risks. From 1971 to 2003, the average Equity REITs annual yield in the USA was approx. 13 per cent. The “Dow Jones Industrials” increased by approximately eight per cent per year over the same period.
Institutional investors (pension funds, banks, insurance companies) have collected huge amounts of capital and seek for profitable financial investments worldwide. REITs are a welcomed option in their portfolio strategy.
For the founders of REITs (persons, banks, funds etc) are an attractive option to build a profitable business platform.
For Private Equity Funds in the field of real estates REITs are a welcomed option to exit their short term engagement.
For owners of large real estate portfolios –companies or the public sector – REITs are a very attractive option to sell real estate (housing and other). Especially if these sales get privileged by the taxation systems (planned i.e. in Germany, India, Pakistan).
States and public institutions through REITs have an attractive option to sell out their public real estates (privatisation of housing, land and infrastructure) in order to improve their budget with short term perspective. By introducing REITs they may also earn from taxes paid on the sale.
Companies by REITs can get rid of their “hidden concrete gold” (including rental housing for employees and other obligation) and free up the capital for investments in their “key business” or other financial transaction.
For neo-liberals REITs are an instrument to get rid of public engagement and introduce market relations.
For competing governments and global cities REITs are an element for strengthening their financial business and stock exchanges.