A Real Estate Investment Trust (REIT) is a kind of real estate company or an association that offers common shares to the public. REIT is a kin to any other stock that represents ownership in an operating business. A Real Estate Investment Trust or REIT is an organisation that helps corporation investing in real estate reduce or eliminate corporate income taxes. The REIT structure has been designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.
Like other corporations, REITs can be publicly or privately held. Public REITs may be listed on public stock exchanges like shares of common stock in other firms. REITs can be classified as equity, mortgage or hybrid.
REIT has two unique features:
1) Its primary business is to manage and maintain groups of properties that yeild good income
2) It distributes most of its profits as dividends.
After this small introduction to REIT below are the various advantages of REITs.
1) REITs boost and help to stabilize capital access, and reduce capital costs. Capital, especially long-term capital, is a vital resource for the property business, and REITs have proved effective in attracting it. Their ability to pull chunks of capital is nothing but undoubtedly a reflection of their public status and their tax efficiency. Unsecured debt, the most flexible debt type has been a hallmark of REITs, and has helped them in improving both their strategic and financial flexibility.
2) REITs are all about integrated property businesses. Say for, most REITs in the leading national markets are internally managed, and have diverse skills in property development, redevelopment, acquisitions, divestitures, leasing and management. This in turn helps in creating long-term, value-added ongoing enterprises, and not just assemblages of assets or "deals".
3) REITs also help in attracting foreign capital. Transparent, liquid entities such as REITs are trusted by foreign firms eager to invest and thus help in bringing this huge amount of foreign capital in the country. This is another feature that proves REIT's financial flexibility.
4) REITs help in developing and growing the nation’s economy. With emergence of REITs comes better transparency and efficiency, and access to stable, global and more competitively priced capital, as well as stronger and more professional property businesses and all this helps in the growth of economy.
Despite of REITs being incredibly beneficial, assurance for a broader economy and a platform for institutional and retail investors, still have certain issues associated with them which are needed to be resolved.
1) If interest rates rise, this hike might instigate people to invest in Treasury securities thus drawing funds away from REITs and lowering their share prices.
2) It is mandatory for REITs to pay property taxes, which can make up to 25% of total operating expenses which leads to reduced cash flows to shareholders.
3) One of the downsides to the high yield of REITs is that the dividend is distributed from Net Income Before Tax and the taxes get due on dividends. It goes even worse as tax rates are typically higher than the 15% on dividends, as this chunk of a REIT's dividends considered ordinary income, which is usually taxed at a higher rate.
Contributed By : Pankaj Thukral
Like other corporations, REITs can be publicly or privately held. Public REITs may be listed on public stock exchanges like shares of common stock in other firms. REITs can be classified as equity, mortgage or hybrid.
REIT has two unique features:
1) Its primary business is to manage and maintain groups of properties that yeild good income
2) It distributes most of its profits as dividends.
After this small introduction to REIT below are the various advantages of REITs.
1) REITs boost and help to stabilize capital access, and reduce capital costs. Capital, especially long-term capital, is a vital resource for the property business, and REITs have proved effective in attracting it. Their ability to pull chunks of capital is nothing but undoubtedly a reflection of their public status and their tax efficiency. Unsecured debt, the most flexible debt type has been a hallmark of REITs, and has helped them in improving both their strategic and financial flexibility.
2) REITs are all about integrated property businesses. Say for, most REITs in the leading national markets are internally managed, and have diverse skills in property development, redevelopment, acquisitions, divestitures, leasing and management. This in turn helps in creating long-term, value-added ongoing enterprises, and not just assemblages of assets or "deals".
3) REITs also help in attracting foreign capital. Transparent, liquid entities such as REITs are trusted by foreign firms eager to invest and thus help in bringing this huge amount of foreign capital in the country. This is another feature that proves REIT's financial flexibility.
4) REITs help in developing and growing the nation’s economy. With emergence of REITs comes better transparency and efficiency, and access to stable, global and more competitively priced capital, as well as stronger and more professional property businesses and all this helps in the growth of economy.
Despite of REITs being incredibly beneficial, assurance for a broader economy and a platform for institutional and retail investors, still have certain issues associated with them which are needed to be resolved.
1) If interest rates rise, this hike might instigate people to invest in Treasury securities thus drawing funds away from REITs and lowering their share prices.
2) It is mandatory for REITs to pay property taxes, which can make up to 25% of total operating expenses which leads to reduced cash flows to shareholders.
3) One of the downsides to the high yield of REITs is that the dividend is distributed from Net Income Before Tax and the taxes get due on dividends. It goes even worse as tax rates are typically higher than the 15% on dividends, as this chunk of a REIT's dividends considered ordinary income, which is usually taxed at a higher rate.
Contributed By : Pankaj Thukral
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