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The real estate stock market is becoming a popular method of investment for both long-term and short-term traders. Real estate stocks are seen by some as relatively stable investments, although share prices can fall during periods of economic instability or market crashes. This can signal a good time to invest in real estate stocks and real estate investment trusts (REITS).
Buying, selling and trading real estate shares in the UK is an easy way of access to the real estate sector without the hassle of financing and managing physical properties. Real estate can be a long and difficult process; therefore, REIT investing and share trading is an easy option with the benefit of monthly dividend payouts.In fact, real estate investment trusts are required to pay out at least 90% of income in the form of dividends to shareholders, with some paying the full 100%. This article will explain how you can trade on REITs, real estate shares and ETFs with our online trading platform, Next Generation. The information is up to date as of May 2021.
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What is a REIT?
Real estate investment trusts (REITs) are companies that rely on taxable income from owning, operating or subsidizing real estate projects. In order to qualify as a REIT, the company must invest at least 75% of its assets in different property types, and this percentage must come in the form of rental income or mortgage interest. Therefore, whereas most REITs aim to focus on a particular sector, such as residential buildings or data centres, the majority have diverse properties within their portfolio.
Real estate properties fall into three categories: residential, commercial and industrial. These can include hotels and resorts, rental properties, shopping centres, student housing and many other property types. REIT sectors are more specific and described in more detail in this article. Many real estate stocks are featured on major stock indices, for example the FTSE 100 and S&P 500, which act as a benchmark for the real estate industry.
Most REIT shares trade on major stock exchanges across the world, including the London Stock Exchange (LSE). You can find publicly traded REITs on the stock market, where individual investors can buy, sell and trade shares, and these transactions are usually regulated by the Financial Conduct Authority (FCA). Read more about stock market hours.
On the other hand, non-traded REITs are registered with the FCA but do not trade on a national exchange. This means that there is less traffic and liquidity, but some traders prefer to trade non-exchange traded REITs as there are not as many resulting market fluctuations, and share prices tend to be less volatile. This is also applicable for private REITs, although these are not regulated by the FCA and are exclusive to institutional investors.
REIT ETFs
Real estate investment trust ETFs are exchange-traded funds that work slightly differently to stocks. These ETFs hold and track REIT stocks within a particular sub-category, allowing traders more exposure to the underlying shares. Whereas REITs represent one single company or share to invest in, ETFs represent a whole index within the real estate industry. This means that traders can invest into a number of stocks at once with the hope that a well-performing company can offset risk, if another company is to start performing poorly.
Our platform offers a number of REIT exchange-traded funds to trade, including some of the largest ETF providers worldwide, such as iShares, Vanguard and Invesco. Leveraged ETFs are complex financial instruments that carry significant risks, and certain leveraged ETFs are only considered appropriate for experienced traders. You can trade exchange-traded funds with a live account only, where you can also access our trading forum and other exclusive platform tools.
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Different types of REITs
Equity REITs
This is the most common type of REIT. These real estate investment trusts generate income through properties that they own in the long-term and collect rent for. This can include offices, retail spaces and shopping centres, as well as apartment complexes that are leased to tenants. They pay a large amount of their income in the form of dividends to shareholders.
Mortgage REITs
Mortgage REITs or mREITs do not directly own real estate, but instead, they finance real estate projects and earn income from interest on these investments. This happens through purchasing mortgages or mortgage-backed securities and usually applies to residential REITs.
In general, the two most common types of real estate investment trusts are equity REITs and mortgage REITs. However, there a number of additional REIT sectors that fall into sub-categories, which include the following:
- Office REITs: skyscrapers, biotech firms, office parks, government buildings
- Industrial REITs: warehouses, distribution centres, e-commerce properties
- Retail REITs: shopping centres, power centres, grocery stores
- Infrastructure REITs: telecommunication towers, energy pipelines, wireless infrastructure
- Residential REITs: student housing, apartment complexes, family homes
- Healthcare REITs: hospitals, medical office buildings, doctors’ offices, care homes
Top REITs to watch
Pricing is indicative. Past performance is not a reliable indicator of future results.
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How to buy shares in real estate
Real estate stocks can be bought and sold at spot price, which is a popular method for long-term investors and position traders that want to hold an asset for an extended period of time, while following its price fluctuations. The aim of long-term share trading is to buy the real estate stock at a low price and hold it while the market continues to thrive, and then sell it for a higher price. However, selling high is not always guaranteed, and you may be stuck with your physical share for a long time if the real estate market crashes or enters a financial crisis. Therefore, short-term trading may be an easier option, as explained below.
How to trade REITs
An alternative to buying REIT stocks is to trade on the price movements of the underlying asset without actually taking ownership. This is possible with a spread betting or CFD trading account. In particular, spread betting is a tax-efficient way* to trade real estate shares in the UK without extra fees or commissions.
Traders can open a long or short position on a REIT stock and depending on which way the market moves, this will result in profit or loss. Traders of our platform are required to trade on margin; therefore, we encourage you to devise an efficient risk management plan beforehand. As profits can magnify with leverage, losses can magnify just as easily.
Open a live account now to start trading real estate stocks and REIT ETFs, and familiarise yourself with our award-winning spread bet and CFD trading platform, Next Generation. You can filter by sub-type on our Product Library, as demonstrated below, by using the 'Property' filter. This gives you a list of over 300 REITs, real estate shares and exchange-traded funds from a variety of countries and asset classes.
Benefits of REITs
REITs spend the majority of their income in the form of dividend payouts to investors, and in return, they are not required to pay income tax on their properties. This is much higher than stock dividends, and can last for many years if the company is performing well. This is why many investors choose to trade REITs instead of real estate stocks. REITs also prove to be consistent in terms of income, market performance, liquidity within the stock market and can be a good way to diversify your portfolio. However, with all benefits of a financial instrument come risks, as explained below.
What are the risks?
One concern for investors when trading real estate stocks is the issue of interest rates. When interest rates rise at a point of economic growth, this often causes share prices to fall and earnings to drop also for the business. This is not a positive move for traders who have a large stock portfolio, as he may need to short sell the stocks in order to avoid future loss.
However, REITs often react in the opposite way to this. REIT prices tend to rise along with interest rates, as economic growth helps to boost the value and subsequent earnings of real estate investment trusts. Therefore, REITs are seen by someas safer than stocks in terms of inflation and interest rates.
There are also other risks involved that you need to be aware of.
Although the price of REITs generally rise with increasing interest rates, there is also the potential that they will be affected by times of uncertainty within the real estate market. For example, a national recession can cause the real estate sector to weaken in general. This means that the value of REITs and real estate stocks will decrease in a similar way.
It is perhaps safer to open positions for both real estate stocks and real estate investment trusts, with the aim of building a more diversified portfolio. In turn, this will help to offset the risk of one investment that is performing poorly with another.
*Tax treatment depends on your individual circ*mstances. Tax law can change or may differ in a jurisdiction other than the UK.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circ*mstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
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*FSCS is an independent body that offers protection to customers of financial services firms that have failed. The compensation amount may be up to £85,000 per eligible person, per firm. Eligibility conditions apply. Please contact the FSCS for more information.
