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Real Estate Investing — Equities

What you need to know about how to start investing in real estate

Real estate is a critical asset class to understand, and every investor—no matter how old or rich they are—cannot afford to ignore how important real estate is to the broader market.

Real estate investing can be, at times, confounding and daunting. There are dozens or perhaps hundreds of real estate investment strategies and property types. It’s easy (and all too common) for investors to grow enamoured with one real estate market segment or become paralysed by seemingly endless options.

That’s why we created this guide. We break it all down so you can make practical, first-class investing decisions through real estate.

Ninety percent of all millionaires become so through owning real estate.

- Andrew Carnegie, billionaire industrialist

What Are Your Options?

Most real estate investors stick to a niche, at least in the beginning of their investing career. That’s not a bad thing; in fact, picking one type of investment property and mastering it is probably better than trying out 15 different strategies.

As we’ll explain, some real estate investment strategies centre around many different property types at the same time. This is one of the most important (and exciting) lessons about real estate: there’s a little something for everyone.

Getting started: Investments in real estate are generally executed through public and private investment vehicles.

Real Estate Investment Vehicles

Each vehicle category has its benefits and considerations, and Avenue 28 will explore these in future articles.

You might utilise any of these investment vehicles during your life, but it’s important that you first develop an investment strategy within which to include your vehicle of choice. For example, there is a very real, practical difference between a wholesale strategy and a buy & hold strategy. Both are different to a fix & flip strategy.

A rock-solid investment vehicle does you no good if it doesn’t help you reach your specific investment goals. Just make sure that you take the time to pick the best real estate strategy for you. Then you can decide which investment vehicles is most appropriate.

 

Public Real Estate Investments

If you have any investing experience, you probably already know that “public” doesn’t mean “common ownership” or “run by the government.” Rather, “public” just means that ownership of an investment asset is split up into shares and traded on public exchanges, such as the London Stock Exchange (LSE) or New York Stock Exchange (NYSE).

Real Estate Equities

Public equities, such as shares and mutual funds, are highly valuable investment channels for real estate investors. This is particularly true for investors who don’t feel they have the expertise to try direct investments or who don’t want to pay the high fees typically associated with private equity investments.

In the public equity market, retail investors can buy shares in companies that specialise in very specific real estate strategies. Usually, such companies also specialise by geographic region. For example, China HGS, which trades on NASDAQ (ticker: HGSH), works exclusively on property projects in Tier III and Tier IV cities in China.

Geography is very important for real estate investors. There’s an old expression that real estate all boils down to three factors: location, location, and location.

Some real estate markets are heavily saturated and highly competitive. In Singapore, real estate companies account for more than 13% of total market capitalization (see Table 1 & Table 2 below). That’s a significantly higher percentage than on the NYSE or LSE.

 
Table 1: Distribution of Real Estate Stocks & REITs across selected Stock Exchanges by Market Capitalisation
NYSE NASDAQ LSE SGX
USD bn USD bn USD bn USD bn
Real Estate 58.2 0.2% 9.4 0.1% 48.6 0.9% 61.9 13.7%
REITs 908.3 3.5% 81.3 0.9% 54.4 1.0% 45.0 10.0%
All other industries 24,858.8 96.3% 9,328.5 99.0% 5,311.9 98.1% 345.1 76.4%
As at Dec 2016 Source: NYSE, NASDAQ, LSE & SGX
 
Table 2: Distribution of Real Estate Stocks & REITs across selected Stock Exchanges by Count
NYSE NASDAQ LSE SGX
# # # #
Real Estate 29 0.9% 20 0.6% 89 3.9% 35 11.2%
REITs 195 6.2% 37 1.2% 31 1.4% 31 9.9%
All other industries 2,946 92.9% 3,152 98.2% 2,162 94.7% 247 78.9%
As at Dec 2016 Source: NYSE, NASDAQ, LSE & SGX
 
  • Benefits of Real Estate Equities

    Like all publicly traded equities, basic real estate stocks are easy to access and understand. The markets are liquid, transparent, and do not require a lot of up-front capital. For beginning investors or investors looking for limited, simple exposure, these can make a lot of sense.

    • Low Barriers to Entry
    • Availability of Information
    • Low Transaction Costs
  • What to Consider Before Investing in Real Estate Equities

    Publicly traded assets do not always trade at their fundamental, or “intrinsic,” values. Market conditions may drive the price of real estate equities much higher than their underlying physical real estate values would otherwise indicate. The opposite may also be true.

    Moreover, it can be challenging to enter and exit the stock market at the most opportune times. Indeed, most investors are advised against trying to "time" the stock market.

    Finally, make sure you understand that real estate equities do not entitle you to any physical ownership of the real estate. You have no collateral or security claims against the property, meaning your investments, though real and legal, are ultimately just paper.

    • No Collateral / Security
    • Fundamentals vs. Market Condition
    • Difficult to Time the Market
Real Estate Investment Trusts (REITs)

A very specific and unique kind of public equity vehicle is the Real Estate Investment Trust, or REIT (pronounced “reet”).

Think of REITs as the low-cost, high-diversification option for real estate equity investors. Whereas a standard commercial property company might specialise in student housing units or hospitals, a REIT might invest in many different kinds of investment properties.

Just as mutual funds are to stocks, so are REITs to standard real estate public equities.

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FACTS ABOUT REITS


  • According to NAREIT data, REITs provided the largest increase in wealth over the period between 1972-2014 when compared to stocks, bonds, and government debt
  • Equity REITs have more than 75% of their holdings in investment properties
  • Mortgage REITs have more than 75% of their holdings in mortgage- and debt-related instruments
  • REITs investors receive income from the revenue that the commercial properties in the REIT produce
 

Important: Not all REITs are publicly traded. Some REITs are private, which means they are not registered with or listed on public equity exchanges.

In addition to their diverse portfolios, REITs must also follow a specific set of financial rules—though rules vary between countries and regions.

For instance, to qualify as a REIT investment in the United States, each REIT must derive no less than 75% of its gross income from real estate activities. Each REIT must invest no less than 75% of its total assets in real estate. Critically, every REIT must distribute no less than 90% of taxable income to shareholders each year. If these standards are not met, the company cannot qualify as a REIT.

For a cross-reference comparison, click here.

The emphasis on dividend payments is an extremely attractive quality for REITs, especially for investors who are focused on cashflows and yields.


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