When thinking about investing in real estate, buying houses, apartments or commercial properties may come to mind. However, there are ways of getting into the property market without having to buy property. In this article, we share some ways to invest in real estate through the financial markets.
What is investing in property?
Investing in property generally falls into two categories: physical investments and investments that do not require physical ownership of property.
Physical investments involve purchasing residential properties, commercial properties or land. Investors profit (or lose) differently with physical real estate investments. For example, if you buy a property, you could then flip it in which the property is renovated with the intention of selling for a profit. You could also receive rental income from the property by renting out the whole property or separate rooms to tenants. Typically, with physical property investments, a substantial amount of capital is needed.
Aside from traditional bricks and mortar property, you can invest in property through several financial instruments. We go over some of these in more detail in the next section.
Adding property to your portfolio
Aside from investing in physical properties, investors can experience capital gains (or losses) from real estate in the financial markets. Some popular financial instruments to add property to your portfolio are real estate investment trusts (REIT), real estate exchange traded funds (ETFs) and stocks of companies involved in the industry.
REITs
A REIT is a company that usually generates income by producing and owning real estate. Some REITs are publicly traded on the exchange and some are not. By investing in REITs, investors are indirectly investing in the real estate the company owns. Like with ordinary shares of a company, investing in REITs usually gives the investor voting rights.
In contrast to other real estate companies, REITs are not engaged in property development in order to resell it. REITs own or lease real estate property and consequently pay out the income from rent to investors. This is called dividend-based income. These properties can vary and can include everything from office buildings, hotels, retail centres, and houses, to data centres and cell towers.
Since rents are usually stable, the income stream from a REIT investment can also be considered relatively stable in normal market conditions. However, we are currently in a time where market conditions are not normal due to the implications of Covid-19, which ultimately can impact income streams from REITs. For example, travel restrictions, stay at home measures and economic uncertainty have impacted travel and hotel bookings, ultimately possibly dampening cash flows from hotel REITs.
During the time period 01.01.20-29.09.20, the most traded REITs via our platform were:
- APPLE HOSPITALITY REIT (US03784Y2000)
- AMERICAN TOWER CORP. REIT (US03027X1000)
- W.P. CAREY INC. REIT (US92936U1097)
Real estate ETFs
If you are unfamiliar with ETFs, they are a type of product that follows an index, commodity, bond or composition of products. The performance of an ETF follows the price movements of the underlying products in the fund. In this case, real estate ETFs include a basket of securities in the real estate sector. Oftentimes, these funds’ components include REITs and can be designed to mirror an underlying REIT index.
Some of the main advantages of REIT ETFs, and ETFs in general, are that they trade like stocks on the stock market and therefore can be more flexible compared to other investment funds and they can have lower costs because they are typically passively managed. Additionally, they enable investors to gain exposure in a diversified range of real estate securities or REITs with a single investment.
Real estate stocks
If you are interested in investing in real estate, you can also do so with property shares. There is a wide range of possibilities to gain exposure in real estate with stocks. One way is by investing in stocks of companies that own real estate and engage in similar activities as REITs but do not meet the criteria to be considered a REIT.
It is also possible to invest in companies whose primary business is not managing or owning real estate but can benefit when the real estate market is doing well. Examples of such companies could be construction supply companies, real estate websites and companies that sell real estate on behalf of owners.
Risks of investing in property
If you want to invest in property, it is important to understand the risks involved. Different investments involve different kinds of risk. For example, if you choose to invest in property via the financial markets and buy REITS, a rise in interest rates could impact your investment as REITs have historically not performed well in this scenario. In the same scenario, if the REIT you purchased is denominated in a foreign currency, you would also be exposed to currency risk.
As you can see, many types of risks can be involved and risk will vary from one investment to another. Therefore, it is essential to first get a complete understanding of the risks involved with an investment and making sure it is in line with your investment plan before going ahead with it.
The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Please be aware that facts may have changed since the article was originally written.
Sources: Investopedia, Forbes, The Street
