Real estate stocks: What are REITs?

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REITs serve as an investment opportunity in real estate
REITs usually offer a lucrative dividend yield
REITs are vulnerable to changes in interest rates

Real Estate Stocks: What are REITs?

REITs (Real-Estate-Investment-Trusts – in German: real estate investment companies) are a form of investment that enables investment in real estate on the basis of stocks traded on the stock exchange. The REIT asset class was introduced in the USA as early as 1960, while Germany followed relatively late in 2007. These are public companies that own, operate and/or finance real estate. Most REITs generate their main income from the rental of apartments, houses, offices or commercial space. Consequently, it is possible for investors to acquire shares in a large real estate portfolio by investing in REITs – and without a large amount of equity. Another special feature of REITs are particularly high profit distributions to shareholders. In some cases, companies distribute more than 90 percent of their profits to shareholders in the form of dividends, which makes the shares particularly interesting for dividend seekers.

What are the advantages and disadvantages of REITs?

REITs ultimately combine an investment in real estate with an investment in shares. Compared to other stock corporations, there is also the special feature that in most countries there is a tax exemption for profits at company level. In combination, at least 90 percent of the profits must be paid out to the shareholders for the tax exemption, so that despite the tax exemption on the company side, sufficient tax revenue can still be ensured. Investors can therefore count on high, regular and easily planned dividends and thus build up a passive income. In addition, unlike open-ended real estate funds, REITs can be traded without holding periods or additional taxes. For tax purposes, REITs are treated like any other stock. The risks associated with this asset class include a high degree of volatility in the event of changes in the economy, particularly with regard to changes in interest rates. Since REITs often finance their acquisitions of real estate through loans, periods of low interest rates are significantly more lucrative for companies and, on the other hand, a rise in interest rates can quickly affect share price development, as reported by Estelle Stangier from Finanztrends.

The prospects of REITs

The corona pandemic naturally had a negative impact on most REITs through home offices and plant closures, as this resulted in rent losses and vacant rental properties. Due to the vaccination progress and a possible end to the pandemic, REITs have already experienced a small recovery, which could continue in the coming months. REITs can also serve to diversify an investor’s portfolio. Anyone who cannot decide on well-known REITs such as Realty Income, STORE Capital or American Tower also has the option of investing in REIT ETFs. The bottom line is that REITs offer a high dividend yield, serve well as an addition to the portfolio and are considered a simple investment opportunity in the real estate sector. It remains to be seen whether the corona crisis will have a lasting impact on the performance of REITs or whether prices will continue to rise soon.

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