Different types of indirect property investment

Shares in Listed Property Companies

• Much more liquid than directly investing into property.
• Investment is diversified over lots of properties.
• Share price can be affected by more than just the asset value, such as quality of the management.
• Shares can be highly geared to allow the company to buy more property.
• The companies invested in can have different investment objectives – i.e. could invest in professional landlord company or could invest in construction company.

Property Unit Trusts & Investment Trusts

• For an investor with limited funds this can be an easier route to get property exposure.
• Both give a wide exposure to the property market, providing diversification, with sufficient liquidity to ensure that investors can realise their holdings.

Real Estate Investment Trusts (REITs)

• The aim of a REIT is to provide a savings and investment vehicle that: 
  1. Provides a liquid market in property investment; 
  2. Is widely accessible by the private investor; 
  3. Has a tax treatment that is closely aligned to the tax arrangements in place for direct investment in property. 
• REIT must be a closed ended company and listed on a recognised stock exchange
• REIT usually has two separate elements for tax purposes, as follows:

1. a ring-fenced property letting business, which is exempt from corporation tax (except on sales of certain property developments); and
2. the remaining non-ring-fenced business, which contains any other activities, e.g. the provision of property management services. Profits and gains from this business are subject to corporation tax.

• In order to qualify as a REIT: 

1. At least 75% of the company’s total gross profits must be from the ring-fenced tax-exempt business; 
2. At the beginning of each accounting period, the value of the assets in the tax-exempt business must be at least 75% of the total value of the assets; 
3. REITs cannot have an excessive amount of debt financing. Interest on borrowings has to be at least 125%, covered by rental profits.