Many REITs are registered with the Securities and Exchange Commission (SEC) and are traded on a stock exchange. These are known as publicly traded real estate investment trusts (REITs). Others may be registered with the Securities and Exchange Commission (SEC), but they are not publicly traded. Non-traded REITs are what they’re called (also known as non-exchange traded REITs). One of the most crucial contrasts between the various types of REITs is this. Before investing in a REIT, make sure you know if it’s publicly traded and how that can influence the benefits and dangers you face.
Does a REIT have to be listed?
Many believe that UK real estate investment has a strong track record of drawing investment flows as an alternative asset class for institutional investors such as pension funds, insurance companies, sovereign wealth funds, and private equity, both domestically and globally.
A UK REIT is a real estate investment trust that meets the conditions set forth by Her Majesty’s Revenue and Customs, the UK tax body (HMRC). The following are some of the eligibility criteria:
- The property investment business should be organized as a UK-based corporation (or set of businesses).
- The primary goal of the company is to invest in real estate (in the UK or abroad), and more specifically,
- Real estate rental income accounts for at least 75% of the company’s profits, and
- At least 75% of the company’s gross assets are made up of cash or assets used in the real estate rental investment sector.
- The company must not be a close company or must be a close company only because one or more ‘institutional investors’ are participants (which includes, inter alia, a person acting on behalf of a limited partnership which is a collective investment scheme, UK or overseas pension schemes, REITs, life insurance business, open-ended investment companies, authorised unit trust schemes, certain charities or sovereign immunity investors)
A tax-efficient, risk-diversified, pooled investment in a UK REIT provides investors with investment returns closely associated to an investment return on the UK commercial or residential property rental market.
A UK REIT, although being a UK tax resident firm, provides an investment platform that is immune from double taxation under the UK framework, i.e. it is effectively tax transparent for its investors, shifting the point of taxation from the REIT to the investor.
The income profits and capital gains generated by a UK REIT’s UK qualified property rental operation are exempt from UK corporation tax. The profits (income and gains) from the property rental company are tax-free, but dividend distributions to investors are taxed in the hands of the investors.
In each accounting period, UK REITs must distribute at least 90% of their taxable income to investors. Investors are taxed according to the laws that apply to their tax domicile, with UK taxation (in regard to international investors) being treated as taxation on rental income and hence subject to a UK withholding tax at the UK basic rate of income tax for non-exempt investors. Exempt investors, such as charities, local governments, pension funds, and other UK corporate tax-paying organisations, can register to receive UK REIT income distributions in their entirety rather than withheld.
Differential rates of UK transfer tax apply to UK firms, enhancing liquidity in secondary market investing in UK REITs.
In contrast to the UK stamp duty land tax of 5% on direct investment in UK commercial property, investment in shares of a UK incorporated REIT will incur UK stamp duty of 0.5 percent on transfer.
One or a limited number of institutional investors can now own 100% of a UK REIT.
Although a UK REIT must be a firm and tax resident in the United Kingdom, this does not entail that the REIT must be formed in the United Kingdom.
Nearly half of the UK REITs admitted to listing on TISE at the time of this briefing are firms incorporated in Jersey but managed and controlled in the United Kingdom.
Companies incorporated in either jurisdiction will be solely tax resident in the UK if managed and controlled in the UK and UK tax resident under UK law, according to the tax legislation of both Jersey and Guernsey.
Jersey / Guernsey company law is very similar to English company law, but it has added some flexibility that REITs incorporated as Jersey / Guernsey companies can take advantage of, such as the ability to authorize distributions on a cash-flow solvency basis, which can provide a more practical and realistic accounting basis for distribution decisions.
The REIT’s board should seek specialized advice on cross-border investor marketing and any applicable regulatory obligations under the applicable law of its domicile, wherever it is established.
TISE is a popular choice for REITs, and more than a third of all UK REITs are listed there.
With a TISE listing, a real estate investment company can meet the requirements for UK REIT registration while saving money and improving operational efficiency.
TISE’s listing authority (TISEA) charges relatively competitive initial and yearly fees, which are currently set at £5,000 for a primary listing for a closed-ended investment vehicle such as a UK REIT and £2,000 for annual listing fees for such issuers.
TISEA also takes a proactive strategy, focusing on building solid relationships with listing sponsors. Its listing and membership committee meets on a daily basis to assess applications, and it provides a quick response: first applications will be responded to within three business days after submission, and subsequent evaluations will be completed within two business days.
The adaption of the generally applicable regulations for free float in the shares of listed investment companies exemplifies TISEA’s business-oriented attitude. In the case of REITs, the general regulation that at least 25% of such listed firms’ shares be held in public hands has been disregarded. This follows the UK’s removal of ownership concentration rules for institutional investor REITs.
As a result, TISE can list joint venture, club investment, or single institutional investor REITs.
TISEA follows internationally recognized stock exchange listing requirements based on London market rules in a pragmatic, balanced, and adaptive manner to the needs of particular investment firms.
The equity listing chapters of TISEA’s listing rules (the Listing Rules), which cover investment vehicles and include REITs, require a UK REIT to meet all conditions for listing.
The listed securities must be freely transferable and tradeable (subject to certain exemptions outlined in the Listing Rules), and the expected minimum market capitalization of the securities to be listed must be at least £1,000,000 and maintained at or above this level for the duration of the listing.
TISEA takes a practical approach to disclosure standards, aiming to provide sufficient information to investors without imposing overly onerous restrictions. As a result, the Listing Document can be relatively brief, but it must contain enough information to allow investors to make an informed decision about the REIT and its listed shares. Specific disclosure requirements are added to this broadly applicable rule. Where such standards do not apply or certain information must be excluded, the listing sponsor might request an exemption from these obligations.
The information in the Listing Document will be the responsibility of the REIT’s directors.
A UK REIT must have at least three directors, at least two of whom must be independent of any investment manager, investment advisor, or associated party, according to the Listing Rules.
Directors of UK REITs must have appropriate real estate investment experience and be able to demonstrate their ability to operate independently of any investment manager that may be recruited.
The UK REIT must provide audited annual accounts that cover at least three years, are consolidated accounts prepared in respect of the issuer and all its subsidiaries (if a UK REIT is required to prepare consolidated accounts under its chosen GAAP), and have been prepared and independently audited by the auditors without qualification (subject to exemptions in the Listing Rules, such as for newly incorporated REITs).
All applications to TISEA for admission to TISE listing and continued eligibility must have the assistance of a listing sponsor who has been authorized by TISEA to operate as such.
- OCFL is a member of the TISEA Rules Committee, which meets on a regular basis to examine TISEA’s Listing Rules in order to improve TISE’s offering and the listing process.
- Former TISE listing and technical managers make up OCFL’s listings team, and they maintain great working relationships with TISEA while providing exceptional technical knowledge and insight to our clients.
- Prior to submitting the initial listing application, OCFL collaborates with the issuer and its professional advisors to ensure the suitability of the proposed listing.
- We provide an ongoing post-listing service to issuers as part of OCFL’s full service offering, providing advice and assistance in relation to TISEA’s Listing Rules and compliance with the ongoing duties applicable to listed issuers.
Following the grant of listing, the REIT must adhere to the Listing Rules’ ongoing requirements. The continuous duties are designed to ensure that all market participants have access to the same information at the same time and to keep the listed securities market orderly.
Are REITs public or private?
There are two types of real estate investment trusts (REITs): private and public, traded and non-traded. REITs engage solely in the real estate industry, leasing and collecting rental income on the properties they own, which is then given to shareholders in the form of dividends.
Are non-traded REITs public?
- Non-traded REITs, which are not quoted on public exchanges, can give ordinary investors access to otherwise inaccessible real estate assets while also providing tax advantages.
- Non-traded REITs must be registered with the Securities and Exchange Commission and make frequent, periodic regulatory filings despite not being listed.
- Non-traded REITs are subject to the same IRS rules as exchange-traded REITs, which include repaying at least 90% of taxable income to shareholders.
How many REITs are publicly traded?
In the United States, there are more than 225 REITs registered with the Securities and Exchange Commission (SEC) that trade on one of the major stock exchanges—the majority on the NYSE. The aggregate equity market value of these REITs exceeds $1 trillion.
Why are REITs a bad investment?
Real estate investment trusts (REITs) are not for everyone. This is the section for you if you’re wondering why REITs are a bad investment for you.
The major disadvantage of REITs is that they don’t provide much in the way of capital appreciation. This is because REITs must return 90 percent of their taxable income to investors, limiting their capacity to reinvest in properties to increase their value or acquire new holdings.
Another disadvantage is that REITs have very expensive management and transaction costs due to their structure.
REITs have also become increasingly connected with the larger stock market over time. As a result, one of the previous advantages has faded in value as your portfolio becomes more vulnerable to market fluctuations.
What is the difference between traded and non-traded REITs?
Non-traded REITs are comparable to publicly listed REITs in that they are registered with the Securities and Exchange Commission (SEC) and are subject to the same laws and reporting requirements. A non-traded REIT’s value is established by an appraisal of the trust’s properties rather than stock market volatility.
Are REITs traded OTC?
REITs (real estate investment trusts) are similar to mutual funds, but they only invest in real estate (although they are not mutual funds). Commercial properties, commercial mortgages, or both make up a typical REIT portfolio. The issuer sells REIT units during the initial public offering (IPO), but they are later traded on the secondary market.
REITs that invest directly in real estate are known as equity REITs. Strip malls, condominiums, and office buildings are common investments in equity REITs, which typically focus on commercial real estate. Leases and property sales are the two main ways equity REITs create money. When a REIT owns dozens or hundreds of properties, it may rent out commercial space and profit handsomely from lease payments.
Additionally, money can be made by increasing property values. When this happens, the REIT’s value grows. These gains can either remain unrealized (unsold) or be locked in by the REIT selling the property and gaining realized capital appreciation (buy low, sell high) for their investors.
Mortgage REITs are companies that buy and sell commercial mortgages. Mortgage REITs earn money from the mortgages they own or issue, rather than investing directly in real estate. The owners of commercial properties make monthly mortgage payments to the REIT when the REIT buys or offers a mortgage. Mortgage REITs, in essence, earn interest on the mortgages they own and distribute it to investors.
There are also hybrid REITs that invest in both real estate and mortgages. Capital appreciation, as well as income from leases and mortgages, provide returns to investors.
REITs make investing in real estate and diversifying portfolios simple. Unlike traditional real estate transactions, which need real estate brokers, property inspections, and negotiations, most REITs can be bought and sold on the secondary market in the same way that stocks can.
With the exception of the Great Recession of 2007-2009, real estate has historically served as a buffer against market declines. Real estate usually retains its value and acts as a counterbalance when stock market values decrease.
Non-listed REITs are those that are not traded on national stock markets (like the NYSE). Non-listed REITs can still be bought and sold on the secondary market, although they may face greater liquidity risks than listed REITs (the most popular REITs are listed on exchanges). When a security is not traded on a stock exchange, it is traded exclusively in the over-the-counter (OTC) markets. Because OTC markets are less active than exchanges, there is a risk of liquidity.
Some REITs are exclusively available to private investors and hence are not required to register with the Securities and Exchange Commission (SEC). When securities are not issued publicly, they are free from several rules and government scrutiny (mainly from the SEC). You’ll learn more about this in the primary market chapter.
When an asset is not available to the general public, investors may find it difficult to liquidate (sell) their holdings, posing a considerable liquidity risk. Because the security is not available to the general public, the investor cannot simply sell their investment on the open market. Investors in private REITs are often affluent individuals and institutions as a result of this dynamic (and other investors that can withstand liquidity risk).
Subchapter M, generally known as the conduit rule, applies to REITs in the same way it does to mutual funds. REITs can avoid paying taxes on net investment income if they pass at least 90% of it on to their investors (taxes are paid by the investor instead). REITs must also invest 75 percent of their assets in real estate and derive 75 percent of their revenue from real estate investments to be eligible.
What is a privately held REIT?
Private REITs are real estate funds or companies that are not required to register with the Securities and Exchange Commission (SEC) and whose shares do not trade on national stock markets. Institutional investors are the only ones who can buy private REITs.
Is a non-traded REIT a private placement?
Private REITs, like non-traded REITs, are not publicly traded, making them difficult to value and sell. Instead, private REIT offerings are classified as private placements and are exempt from the SEC’s registration requirements. Accredited investors are usually the only ones who can invest.
Who invests in non-traded REITs?
You’ll want to locate specific prospects that suit your investing goals once you’ve decided to invest in real estate. You’ve put in the time and done your homework, and you’ve determined that a Real Estate Investment Trust, or “REIT,” is the appropriate investment for you since it provides rapid diversification and a steady source of income by paying out almost all of its profits each year.
Just when you thought you’d made all of your choices, you learn that there are several distinct types of REITs to choose from. In the end, it comes down to your personal major aims and ambitions. The information in the following guidance is meant to help you decide whether sort of REIT is right for you.
Main Types of REITS
REITs might be public or private, publicly traded or not. Private REITs, public non-traded REITs, and publicly traded REITs are the three basic forms of REITs. Each variety has its own set of qualities as well as benefits and drawbacks.
Private REITs
The Securities and Exchange Commission (the SEC) does not require private REITs to be registered “SEC”) and are not subject to SEC regulation.
Private REIT shares are not traded on a public exchange like the New York Stock Exchange (NYSE) “New York Stock Exchange”). This indicates that stock market volatility has no effect on their stock.
Performance Information: Because there is typically little to no public information given regarding private REITs, obtaining performance information might be difficult unless you are a shareholder in the private REIT.
Who Can Invest: Accredited investors can only invest in private REITs if they have a net worth of at least $1 million, excluding their primary residence, or if they have earned at least $200,000 per year for the previous two years. The SEC wants to make sure that only experienced investors with disposable income buy in these types of vehicles because they are not regulated.
The minimum investment amount for Private REITs available to regular investors can range from $10,000 to $100,0000, while the upfront costs for Private REITs vary by company.
Liquidity: Withdrawing funds prior to a liquidation event might be difficult because redemption programs vary by company and are frequently limited.
Public, Non-Traded REITs
Public, non-traded REITs are governed by the Securities and Exchange Commission (SEC).
Shares of publicly traded, non-traded REITs are not exchanged on a major stock market such as the New York Stock Exchange (NYSE). This means that, like private REITs, their stock is not directly affected by stock market volatility. These REITs are not subject to daily price fluctuations like publicly traded REITs, allowing managers to concentrate on long-term goals rather than daily market fluctuations and quarterly earnings.
Despite the fact that these REITs are not listed on a stock exchange, they are required to file SEC filings and their performance data is publicly available because they are registered with the SEC. Many real estate managers and investors aim to hold on to real estate investments for the long term due to the long-term nature of the real estate market and the work needed in finishing each deal.
Who Can Invest: Anyone, accredited or non-accredited, can invest in publicly listed non-traded REITs, subject to specified investment limits.
Minimum Investment: The minimum investment in a public non-traded REIT is normally $1,000, but this might vary. According to FINRA, many non-traded REITs impose exorbitant upfront fees that can be as much as 15% of the per share price. Non-traded REITS, on the other hand, have been attempting to reshape the market in recent years by demanding reduced upfront costs. Our own REITs, MogulREIT I and MogulREIT II, charge our investors an upfront cost of no more than 3%.
Because non-traded REITs’ shares are not traded on an exchange like private REITs’, redemption schemes are generally limited and vary by company.
Public, Traded REITs
Listed: Unlike private REITs and public non-traded REITs, publicly traded REITs are listed on a stock exchange and are thus vulnerable to stock market volatility.
Performance Data: Because REITs are registered and regulated, they have access to a wealth of public data, both from the corporation that owns and runs them and from third-party sources. Because publicly traded REITs are liquid, public, and have daily pricing swings, there may be a temptation to focus on quarterly profitability rather than long-term investment goals. When the market is down, it may also be difficult to raise funds.
Who Can Invest: Anyone with a minimum investment of one share can invest in publicly traded REITs (at the current share price). The upfront fees are imposed by the broker through whom you purchase your shares, and they may be the same as those imposed by any other publicly traded stock.
Minimum Investment: A public non-traded REIT’s minimum investment varies, but it commonly ranges from $1,000 to $2,500.
Publicly traded REITs, unlike private REITs and public non-traded REITs, are liquid and can be traded every business day, making them easier to redeem.
Summary
Overall, which vehicle you use to invest in real estate through a REIT is determined by a variety of factors, including your current goals and ambitions. Before deciding on which form of REIT investment to make, consider the following questions: What is important to me? Is a more liquid investment, such as a publicly traded REIT, what I’m searching for?
If that’s the case, are you okay with daily price fluctuations and market volatility? Is it your intention to invest in real estate as soon as possible? While non-traded REITs were once derided for their exorbitant costs, numerous companies, including RealtyMogul, have made it feasible for investors to pay lesser upfront fees and put more of their money to work for them.
Learn more about RealtyMogul’s REITs:
MogulREIT I use debt and debt-like products to invest in a variety of commercial assets. MogulREIT I’s major goals are to deliver attractive and reliable cash distributions while also preserving, protecting, and growing an investor’s capital commitment.
MogulREIT II invests in multifamily apartment buildings in major areas in the United States, both in common and preferred shares. The major goals of MogulREIT II are to achieve long-term capital appreciation in the value of our investments and to provide shareholders attractive and reliable cash distributions.
Investing in the Company’s common stock is speculative, carries significant risks, and is not appropriate for all investors. Before investing, read the offering circular’s “Risk Factors” section, which details risks such as illiquidity, full loss of cash, short operating history, conflicts of interest, and blind pool risk. Past performance does not guarantee future outcomes. The investment information presented above has been obtained from sources RealtyMogul believes to be trustworthy, but we make no representations or assurances as to its correctness, and we assume no responsibility. We recommend that you seek the advice of a financial advisor, attorney, accountant, or any other professional who can assist you in understanding and evaluating the risks connected with any investment opportunity.
What are publicly traded REITs?
Individual investors can purchase shares in real estate investment trusts (REITs), which are publicly traded businesses that generate revenue from a variety of assets. They make it simple for investors to invest in real estate firms that own, develop, and manage residential, commercial, and industrial properties.
REITs are required to pay out at least 90% of their taxable profits as dividends, among other things. Funds from operations (FFO), a measure of earnings specific to the REIT business, is an important REIT indicator. American Tower Corp. (AMT), Crown Castle International Corp. (CCI), and Prologis Inc. are some of the industry’s biggest names (PLD).
The COVID-19 pandemic has wreaked havoc on the commercial real estate market, with people all around the world adapting to working from home and different lockdown measures being implemented. Despite the revival of the economy, the recovery of the sector has been patchy. Workers returning to cities to live and work, for example, are now confronted with skyrocketing rates for privately owned and commercial flats, which are far more than when they left.
