How Real Estate Investment Trusts (REITs) work in Ireland

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Property has long been seen as a stable investment, and Real Estate Investment Trusts (REITs) have provided a modern way to invest in Irish property without owning it outright. REITs were introduced in Ireland in 2013, partly to bring some stability to the rental market. On this page, we’ll look at the meaning of REITs, how they work, and their benefits and risks.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

A Real Estate Investment Trust, or REIT for short, is a company that owns or manages income-producing properties, such as office buildings and shopping centres. REITs primarily generate income from rent collected on the properties they manage. Unlike other real estate companies, REITs focus on leasing properties rather than developing and selling them. 

Anyone, from individual investors to large institutions, can then invest in that REIT by buying shares, much like buying stock in any other company. They are paid dividends, which usually comes from the rental income generated, without needing to buy or manage the properties themselves.

REITs were first created in the US in 1960 to give smaller investors access to large-scale real estate investments. In Ireland, REITs were officially introduced in the Finance Act 2013 to help attract investment to the property market after the financial crisis.

Most (but not all) REITs are publicly traded, meaning investors can easily buy and sell shares. While there is never a guaranteed return with investing, REITs tend to be popular among those looking to generate a steady income.

REITs generate income through rental earnings and property value growth. When you invest in a REIT, you buy shares in the trust, making you a shareholder. Similar to owning stocks in a company, this means you’re entitled to a portion of the income the REIT earns from the properties it owns, such as rental payments from tenants or interest on mortgage loans.

So the main way investors make a return on REIT investments is through annual dividend payments from a portion of its profits. The other attraction is the potential for price increases, but it’s not the main focus of most REITs, as most of their income is distributed to shareholders. However, this can vary depending on the particular REIT.

Real Estate Investment Trusts are typically divided into two main categories:

1. Equity REITs – These REITs invest in properties, and they earn income by renting them out and passing the profits on to shareholders in the form of annual dividends. 

2. Mortgage REITs (mREITs) – These REITs invest in mortgages or mortgage-backed securities, and generate income from the interest on them.

You might also come across hybrid REITs, which combine elements of the two. These invest in both properties and mortgages, giving investors exposure to both rental income and interest income.

In addition to equity and mortgage REITs, there are several more specialist types that invest in properties in different sectors:

• Healthcare REITs: Hospitals, medical centres, and care homes.

• Office REITs: Office buildings, business parks, and government buildings.

• Residential REITs: Student accommodation, flats, and family homes.

• Industrial REITs: Warehouses, distribution centres, and e-commerce properties.

• Retail REITs: Shopping centres, retail parks, and supermarkets.

• Diversified REITs: A combination of two or more types of properties, e.g. office buildings and residential properties.

The most common types of REITs investments in Ireland are typically those focusing on office, residential, and retail properties. Other types might be available through global investment platforms. 

Currently, the only publicly listed REIT still operating in Ireland is Irish Residential Properties REIT (IRES), which focuses on residential lettings across Dublin and other major cities. IRES is listed on Euronext Dublin and has a secondary listing on the London Stock Exchange.

To qualify as a REIT in Ireland, companies must meet these key criteria:

• At least 75% of their assets must be invested in real estate, cash, or similar investments.

• At least 75% of their income must come from property-related activities, such as rent, mortgage interest, or property sales.

• They must pay out at least 85% of their rental profits to shareholders as dividends each year.

• The company must be incorporated and resident in Ireland, with shares listed on a recognised stock exchange in an EU Member State.

• It must not be a close company.

For further details on the conditions required, you can read Revenue’s guide to REITs.

You can access REITs through various online investment platforms, but it can help to have a good understanding of investing basics before getting started. You have two main options in Ireland:

1. Invest in the REIT itself - You can buy shares directly in REIT companies or invest through an exchange-traded fund (ETF). Many investors prefer ETFs because they offer a way to diversify their portfolio, which can reduce risk. Publicly traded REITs are listed on major stock exchanges like the NYSE or London Stock Exchange, making them easy to buy and sell. Their price fluctuates with market activity.

2. Trade REIT Price Movements - Alternatively, you can trade REIT shares or ETFs without actually owning them. This involves using a spread betting or trading account to profit from price movements, whether they rise or fall. However, trading REITs can be highly speculative and risky, so it’s important to understand the market before taking this route.

In Ireland, REITs don’t pay corporation tax on income from rental property or capital gains tax on property sales, as long as they meet the conditions mentioned. Instead, the tax responsibility falls to the shareholders.

Irish residents who own REIT shares must pay income tax and Universal Social Charge (USC) on any dividends received. If they sell their shares for a profit, they may also face a capital gains tax of 33% on the gain. Additionally, all dividends are subject to a 25% withholding tax, whether you’re an Irish resident or not. However, non-resident investors may be able to claim a refund on this.

Because the tax rules can be complicated, before investing in a REIT, it might be helpful to check the investor relations page of the REIT, or consult with your local tax adviser. The tax due will depend on the type of distribution and the tax residency of the investor.

Investing in REITs can be a convenient way to earn passive income through dividends while potentially benefiting from long-term property value growth. REITs give investors access to global property markets without the need for real estate expertise. They also provide liquidity, meaning you can buy or sell shares easily – unlike owning physical property.

Aside from the monetary gains, REIT investments are a way to contribute to positive initiatives like healthcare or community development projects. One of the main aims behind the introduction of REITs in Ireland was to improve the quality of rental properties and provide greater security for tenants by bringing in more capital.

However, REITs aren’t without risk. Their value can fluctuate due to changes in property prices, economic downturns, or changes to interest rates. REITs are also sensitive to broader economic events, like the COVID-19 pandemic. Another downside is that investors don’t have control over how their funds are managed. Potential fees and complicated tax obligations can also be off-putting.

To reduce risk, it might help to view REIT investments as part of a diversified portfolio, balancing them with other types of investments. That way, you might be better protected from unexpected market disruptions. Our guide on where to invest or save your money can provide some ideas.

If you’re looking to grow your wealth without the risks that come with investing, high-interest savings accounts such as fixed term deposits could be an ideal alternative. You benefit from guaranteed returns and competitive interest rates, without the potential ups and downs of REITs. By locking in your money for a set period, you can secure a reliable return, especially if you choose a longer term.

Plus, with Raisin Bank, your savings are protected up to €100,000 through the Deposit Guarantee Scheme. Start now by seeing how much you could be earning on a variety of savings accounts.