Investing in real estate

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

If you’re looking to add real estate to your portfolio without actually owning physical property, there are several options you can choose from. Some popular financial instruments you can consider are real estate investment trusts (REIT), real estate exchange-traded funds (ETFs) and stocks of companies involved in the industry.

Investment trusts (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 REITs investment can also be considered relatively stable in normal market conditions. To qualify as a REIT, a company must comply with certain regulatory requirements. Most importantly, they need to return at least 90% of their taxable income to shareholders in the form of dividends. Here are some REITs we offer on our platform:

• APPLE HOSPITALITY REIT (US03784Y2000)
• ARMOUR RESIDENTIAL REIT INC. (US0423157058)
• Sabra Health Care REIT Inc (US78573L1061)
• Tritax Big Box Reit PLC (GB00BG49KP99)
• CARETRUST REIT INC. COMMON STOCK (US14174T1079)

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. Some examples in this case are construction supply companies, real estate websites and companies that sell real estate on behalf of owners.

Here are some examples of real estate stocks:

• Prologis, Inc. (PLD): Specialising in logistics real estate, Prologis owns some of the most strategically located properties worldwide. They're focused on warehouses and distribution centres that e-commerce giants rely on.
• Equinix, Inc. (EQIX): This company is at the heart of digital transformation. Owning over 200 data centres globally, Equinix powers today's online economy by ensuring businesses stay connected.
• Public Storage (PSA): As one of the largest self-storage operators globally, Public Storage has mastered the art of providing space for personal and business needs alike.

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 to a diversified range of real estate securities or REITs with a single investment.

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 through 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 risks 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.

Pros and cons of investing in real estate

Investing in real estate can be a lucrative and rewarding venture, but it also comes with its own set of pros and cons. Let’s take a closer look at some of them:

Pros

• Diversification: Real estate can help diversify your portfolio beyond traditional stocks and bonds.
• Inflation protection: Property values and rents typically increase with inflation.
• Potential for passive income: Rental properties provide potential monthly income.

Cons

• Liquidity risk: Some ways to invest in real estate are more liquid than others. It’s important to check the trading volume of the product when you invest through the financial markets.
• Property-specific risks: Factors such as tenant move-outs, technological disruptions and industry headwinds can impact investment values.
• Volatility: While the real estate sector is generally considered to be less volatile than some other industries, it can be impacted by economic downturns, market fluctuations, among other factors.