Opinion / Columnist
Why you should invest in property
01 Aug 2013 at 04:30hrs | Views
A real estate investment trust (REIT), is generally defined as, a company that owns manage and operates income-producing real estate or real estate-based/linked assets such as mortgage loans.
The REITs structure provide an efficient and cost effective way for individual investors (large scale or small scale) to earn a share of the income produced through industrial/commercial real estate ownership without actually having to go out and buy commercial real estate. The investor also gains on capital gains when the value of the underlying property rises this is reflected by an improved REIT rating and market price.
The income-producing real estate assets usually owned by a REIT can include office buildings/parks, shopping malls, apartments complexes, hotels, casino resorts, warehouse-storage facilities, warehouses, and home mortgages or loans.
In Zimbabwe examples of ideal properties for a REIT include Joina City, Westgate Complex, High Glen Shopping Complex, GMRI Truck Stop, etc. A REIT-based structure would allow individual investors to buy a portion of such or similar Properties via the Trust.
The investment in property via REITs ensures the return of capital and the return on capital in ways which very few assets in any market can match. The return of capital is guaranteed by real estate's nature of appreciating in value over the medium to long term horizon.
The return on capital is guaranteed through rentals, management and administration fees. This makes REITs ideal investment tools for the long-term investors (five years to 40 years investment horizon). This is mirror red in the mortgage terms offered in most advanced markets which target the five to 40 year investment period.
Since REITs are corporations that own and manage a pool or portfolio of real estate properties and mortgages loans it allows investors and fund managers to focus on purely property focused businesses.
Anyone can buy shares in a publicly listed and traded REIT which are very common in the US and most developed countries. They offer the benefits of real estate ownership without the headaches or expense of being a landlord which can be very challenging in difficult operating conditions such as prevailing in Zimbabwe now.
In Zimbabwe the property sector remains dominated by insurance or insurance-related firms. This is mainly because for a very long time only insurance companies have been able to mobilise long-term capital.
Few property-focused companies have emerged such as Pearl, Dawn and Mash Holdings. The market remains highly concentrated and somehow illiquid and this calls for structures like REITs to be carefully studied and slowly introduced
REITs are very tax efficient
The REIT structure is tax efficient. According to the US revenue service IRS "any corporation, trust or association that acts as an investment agent specializing in real estate and real estate mortgages" under Internal Revenue Code Section 856.[1] The rules for federal income taxation of REITs are found primarily in Part II (Sections 856 through 859) of Subchapter M of Chapter 1 of the Internal Revenue Code.
Because a REIT is entitled to deduct dividends paid to its owners, a REIT may avoid incurring all or part of its liabilities for US federal income tax. To qualify as a REIT, an organisation makes an "election" to do so by filing a Form 1120-REIT with the Internal Revenue Service, and by meeting certain other requirements.
The purpose of this designation is to reduce or eliminate corporate tax, thus avoiding double taxation of owner income. In return, REITs are required to distribute at least 90 percent of their taxable income into the hands of investors".
As the Zimbabwe property market develops REITs are a potential way to broaden and deepen the country's property sector whilst adding more investment options for investors. Due to their capacity REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centres, hotels and even timberlands. Some REITs also engage in financing real estate like housing scheme developments or finances building of apartment complexes/flats.
The REIT structure was designed to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks and ensure that commercial property is not a preserve for the rich or huge Institutions.
Investing in some types of REITs also provides the important advantages of liquidity and diversity. Unlike actual real estate property, these shares can be quickly and easily sold. And because you're investing in a portfolio of properties rather than a single building, you face less financial risk.
Brief history of REITs
REITs came about in the 1960s, when the United States Congress decided that smaller investors should also be able to invest in large-scale, income-producing real estate. After several hearings and research it was determined that the best way to achieve this was the follow the model of investing in other industries – the purchase of equity. And to make that equity tradable and liquid by listing them on an Exchange and trade the shares like any other financial asset.
Basic Characteristics to Qualify as a REIT
A corporation must meet several other requirements to qualify as a REIT and gain pass-through entity status. According to US Tax code They must:
Structured as corporation, business trust, or similar association
Managed by a board of directors or trustees
Offer fully tradable/transferable shares
Have at least 100 unit holders/shareholders
Pay out dividends of at least 90 percent of the REIT's taxable income
Have no more than 50 percent of its shares held by five or fewer individuals during the last half of each taxable year
Hold at least 75 percent of total investment assets in real estate
Have no more than 20 percent of its assets consist of stocks in taxable REIT subsidiaries
Derive at least 75 percent of gross income from rents or mortgage interest.Seventy-five percent of its income must come from certain defined real estate sources (the 75-percent income test), including from property management fees, real property rentals, gains from the sale or other disposition of real property, and income and gain derived from foreclosure of property.
A REIT must be an entity that would be taxable as a corporation but for its REIT status; A minimum of 95 percent of a REIT's gross income must come from financial investments (in other words, it must pass the 95-percent income test). These include include rents, dividends, interest and capital gains.
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Disclaimer: GMRI Real Estate is a property holding division of GMRI Capital which owns, manages, develops and leases out its own property. We do not act as agents for the public or third parties.
This article is provided "as is" for informational purposes only as a Public Service, not intended for trading purposes or advice. Prior to execution of any property/real estate trade, you are advised to consult your authorized financial advisor/real estate agent to verify the accuracy of all information.
Neither GMRI Real Estate nor any independent provider is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein.
Contact: 4 Dan Judson Road, Milton Park, Harare. Facebook:http://www.facebook.com/GMRICAPITAL. Twitter: @capital_gmri
The REITs structure provide an efficient and cost effective way for individual investors (large scale or small scale) to earn a share of the income produced through industrial/commercial real estate ownership without actually having to go out and buy commercial real estate. The investor also gains on capital gains when the value of the underlying property rises this is reflected by an improved REIT rating and market price.
The income-producing real estate assets usually owned by a REIT can include office buildings/parks, shopping malls, apartments complexes, hotels, casino resorts, warehouse-storage facilities, warehouses, and home mortgages or loans.
In Zimbabwe examples of ideal properties for a REIT include Joina City, Westgate Complex, High Glen Shopping Complex, GMRI Truck Stop, etc. A REIT-based structure would allow individual investors to buy a portion of such or similar Properties via the Trust.
The investment in property via REITs ensures the return of capital and the return on capital in ways which very few assets in any market can match. The return of capital is guaranteed by real estate's nature of appreciating in value over the medium to long term horizon.
The return on capital is guaranteed through rentals, management and administration fees. This makes REITs ideal investment tools for the long-term investors (five years to 40 years investment horizon). This is mirror red in the mortgage terms offered in most advanced markets which target the five to 40 year investment period.
Since REITs are corporations that own and manage a pool or portfolio of real estate properties and mortgages loans it allows investors and fund managers to focus on purely property focused businesses.
Anyone can buy shares in a publicly listed and traded REIT which are very common in the US and most developed countries. They offer the benefits of real estate ownership without the headaches or expense of being a landlord which can be very challenging in difficult operating conditions such as prevailing in Zimbabwe now.
In Zimbabwe the property sector remains dominated by insurance or insurance-related firms. This is mainly because for a very long time only insurance companies have been able to mobilise long-term capital.
Few property-focused companies have emerged such as Pearl, Dawn and Mash Holdings. The market remains highly concentrated and somehow illiquid and this calls for structures like REITs to be carefully studied and slowly introduced
REITs are very tax efficient
The REIT structure is tax efficient. According to the US revenue service IRS "any corporation, trust or association that acts as an investment agent specializing in real estate and real estate mortgages" under Internal Revenue Code Section 856.[1] The rules for federal income taxation of REITs are found primarily in Part II (Sections 856 through 859) of Subchapter M of Chapter 1 of the Internal Revenue Code.
Because a REIT is entitled to deduct dividends paid to its owners, a REIT may avoid incurring all or part of its liabilities for US federal income tax. To qualify as a REIT, an organisation makes an "election" to do so by filing a Form 1120-REIT with the Internal Revenue Service, and by meeting certain other requirements.
The purpose of this designation is to reduce or eliminate corporate tax, thus avoiding double taxation of owner income. In return, REITs are required to distribute at least 90 percent of their taxable income into the hands of investors".
As the Zimbabwe property market develops REITs are a potential way to broaden and deepen the country's property sector whilst adding more investment options for investors. Due to their capacity REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centres, hotels and even timberlands. Some REITs also engage in financing real estate like housing scheme developments or finances building of apartment complexes/flats.
The REIT structure was designed to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks and ensure that commercial property is not a preserve for the rich or huge Institutions.
Investing in some types of REITs also provides the important advantages of liquidity and diversity. Unlike actual real estate property, these shares can be quickly and easily sold. And because you're investing in a portfolio of properties rather than a single building, you face less financial risk.
Brief history of REITs
REITs came about in the 1960s, when the United States Congress decided that smaller investors should also be able to invest in large-scale, income-producing real estate. After several hearings and research it was determined that the best way to achieve this was the follow the model of investing in other industries – the purchase of equity. And to make that equity tradable and liquid by listing them on an Exchange and trade the shares like any other financial asset.
Basic Characteristics to Qualify as a REIT
A corporation must meet several other requirements to qualify as a REIT and gain pass-through entity status. According to US Tax code They must:
Structured as corporation, business trust, or similar association
Managed by a board of directors or trustees
Offer fully tradable/transferable shares
Have at least 100 unit holders/shareholders
Pay out dividends of at least 90 percent of the REIT's taxable income
Have no more than 50 percent of its shares held by five or fewer individuals during the last half of each taxable year
Hold at least 75 percent of total investment assets in real estate
Have no more than 20 percent of its assets consist of stocks in taxable REIT subsidiaries
Derive at least 75 percent of gross income from rents or mortgage interest.Seventy-five percent of its income must come from certain defined real estate sources (the 75-percent income test), including from property management fees, real property rentals, gains from the sale or other disposition of real property, and income and gain derived from foreclosure of property.
A REIT must be an entity that would be taxable as a corporation but for its REIT status; A minimum of 95 percent of a REIT's gross income must come from financial investments (in other words, it must pass the 95-percent income test). These include include rents, dividends, interest and capital gains.
----------
Disclaimer: GMRI Real Estate is a property holding division of GMRI Capital which owns, manages, develops and leases out its own property. We do not act as agents for the public or third parties.
This article is provided "as is" for informational purposes only as a Public Service, not intended for trading purposes or advice. Prior to execution of any property/real estate trade, you are advised to consult your authorized financial advisor/real estate agent to verify the accuracy of all information.
Neither GMRI Real Estate nor any independent provider is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein.
Contact: 4 Dan Judson Road, Milton Park, Harare. Facebook:http://www.facebook.com/GMRICAPITAL. Twitter: @capital_gmri
Source - GMRI Real Estate
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