A Real Estate Investment Trust [REIT] is a special type of property rental Company, incorporated in the State and listed on a recognised stock exchange in any EU member State. There are certain conditions applying to an Irish REIT:
- It must be established for the sole purpose of generating rental income but its properties don’t have to be located in Ireland.
- The properties can be residential or commercial or a mix and at least 75% of its total income must come from rents.
- It can borrow up to 50% of the value of its assets and must own at least 3 rental properties but no one property can be worth more than 40% of total assets.
- The company must pay out at least 85% of its property rental income as an annual dividend to shareholders.
The REIT Company will not itself pay tax on its rental income or capital gains. Individual investors will be liable to income tax and USC on dividends and Capital Gains Tax [CGT] at 33% on any gains made after the annual €1,270 chargeable gains exemption.
REITs appear to be less attractive for income returns for higher rate taxpayers but could be attractive to older investors who are under the income tax exemption limit and who could therefore earn tax-free dividends.
Investors who have large accumulated losses for CGT purposes, e.g. bank shares, may also be attracted to a REIT investment by the prospect of being able to offset those losses against any gains made on selling REIT shares later on.
It is likely that the National Assets Management Agency [NAMA] will establish a number of REITs in order to offload part of its vast property portfolio. Each REIT might contain a package of different properties and banks are likely also to establish REITs made up of repossessed buy to let properties that could be sold on to investors.
While yields on REITs may well be above 5%, bear in mind there will be no capital guarantees and their value can go down as well as up.