Real estate stocks – profiting indirectly from the real estate market
Owning a home is still a major goal for many people. However, there are also some disadvantages associated with owning a property. These include a certain degree of bulk risk and having to pay off a loan for a long time. However, it is now also possible to invest in the property market without buying a property and thus benefit indirectly.
In brief:
- Real estate stocks offer an opportunity to participate in the profits of the real estate market, even on a small budget
- So-called REITs are a special form and are characterised by a high distribution to their shareholders
- The actual objects behind the stocks offer additional security
What are real estate stocks?
Basically, real estate stocks are stocks of companies from the property sector. These include companies that trade in property, rent it out to others or hold it in their portfolio. For example, companies can make profits by acquiring properties cheaply and selling them again at a profit after renovations.
Such property companies can be, for example, estate agents, housing associations, property management companies or engineering firms. These companies can also be divided into different areas such as the residential property segment or the commercial segment.
Good to know:
Investors have various options for investing in property shares themselves. They can profit from rental income or the sale of property portfolios.
Investing in REITs
A REIT or Real Estate Investment Trust is a special form of real estate stock. Ordinary stock corporations focussing on real estate can operate like any other stock corporation. A special feature of REITs is their strict regulation.
These regulations ensure that REITs focus primarily on property. They must also distribute the majority of their profits to their shareholders. REITs are mostly listed companies that exist worldwide. The exact regulations differ from country to country.
What do REITs invest in?
In short, the strict regulations governing REITs mean that they are allowed to manage, hold and sell property. In Germany in particular, they are limited to commercial property. There is a separate regulation for residential property: Investments may be made in properties built after 2006.
Good to know:
The structure of REITs plays a role for interested parties. 75 per cent of the assets must be invested in immovable assets. This means land and property. In some cases, REITs may also invest in other asset classes. Examples include other real estate companies.
In principle, the rules state that the focus of REITs is on passive investing. As a result, real estate may not be bought and sold in the short term. Every five years, a maximum of half of the property portfolio may be exchanged through sales and new purchases. If the entire property portfolio is to be exchanged, this may take place every ten years.
How high are the distributions of REITs?
One advantage is the high, regulated distribution of REITs to their shareholders of at least 90 per cent. Profit is defined by the net profit for the year under commercial law. Important costs such as depreciation, taxes, staff employed and other items are therefore already paid.
Different types of REITs
This type of investment differs mainly in terms of its investments. Each REIT has a specific focus on a particular area. What they have in common is that they invest in real assets and can basically be divided into two different categories:
- Mortgage REITs: They invest in bonds that are collateralised by mortgages on real estate. Profits are made from the interest on the bonds.
- Equity REITs: Investments are made in tangible assets. Profit is made through profitable sales or income from rental payments, for example.
- Hybrid REITs: This special form is a mix of the two mentioned above: they invest in real assets and bonds.
REITs and taxes
In contrast to other companies, REITs have a tax advantage in Germany. Corporation tax and trade tax do not apply to REITs. For other companies, these must be paid at a rate of 15 per cent.
Worth knowing!
The elimination of such taxes means that significantly more profit remains at the end of the day, most of which has to be distributed to shareholders. However, it is not entirely tax-free: as with other dividends, capital gains tax must be paid on REITs.
Advantages of investing in real estate stocks
- Trading stocks is much easier than owning your own property. Nevertheless, you can benefit from the advantages of a property
- Many experts consider real estate stocks to be safer than normal stocks, as they are backed by real properties
- Real estate stocks offer a cheap way to profit from gains in the property market. Not everyone can afford their own property, but you can invest small amounts in real estate stocks
- Real estate stocks are a fungible form of share: investors can also resell their stocks at short notice
- By investing in different real estate stocks, a higher spread or diversification can be achieved, which leads to a lower risk
- Real estate stocks are associated with low costs, for example there is no issue surcharge
- Indirect investments make it possible to draw on the knowledge of experts who have been dealing with property for years and usually have more knowledge than individual investors
- REITs are particularly suitable for investors who pursue a dividend strategy: Permanent rental income leads to high distributions to investors. Incidentally, the payout ratio of REITs must be at least 90 per cent
Investing in real estate stocks – these are the risks
Compared to other property investments, real estate stocks are more volatile. This means that prices can fluctuate and fall considerably at times. Investors should be prepared for this. In such phases, investors have only limited access to the capital they have already invested.
Potential investors should also be aware that the performance of stocks depends on the development of interest rates. If interest rates rise, this will make it more expensive for companies to borrow capital.
Theoretically, there is also the risk of a total loss, as with other stocks. If the property company has to file for insolvency, the share price plummets and the capital invested may be completely lost. However, it should be noted that there are different forms of investment in real estate. One alternative could be real estate ETFs, for example, which offer more diversification.
Attention!
Anyone investing in individual real estate stocks should also have knowledge and expertise in the industry. Individual stocks lead to a higher risk. Investors should also keep themselves regularly informed about developments in the property market.
Taxes should also not be overlooked. When buying a real estate property as an investment, tax is not payable once the so-called speculation period has expired. The speculation period is ten years. However, this does not apply to gains from real estate stocks, which must be taxed as normal.
Conclusion: Investing in real estate stocks and REITs
With the help of real estate stocks and REITs, investors with a low budget can also benefit from the property market. The actual properties behind the stocks offer a form of security. However, the high volatility of this asset class should also be considered before investors invest money.
REITs, a sub-form of real estate stocks, are particularly interesting. A key advantage is the high payout due to strict regulations, which stipulate that 90 per cent of the profits generated must be distributed to shareholders.
FAQ – Frequently asked questions about real estate stocks
