Real Estate Securities

There are two ways that you can invest in real estate, by actually buying property, called private investing, and by buying real estate securities, known as public real estate investing.

Real estate securities have many advantages over private real estate transactions. The first and most obvious one is that public real estate investment is highly liquid, as liquid as investments come, where private real estate investing is notoriously illiquid.

Real Estate SecuritiesIf you buy a property yourself, regardless of the type of property it is, you just can’t get out of it on a dime. You have to put it up for sale on the market and hope that a seller will pop up over a reasonable period which will give you a reasonable price for your property.

This lack of liquidity isn’t just a matter of how much time it takes to sell, as the number of market participants factors into this as well, as in how few there may be. One may even own a certain type of property in a certain location which may have no prospective buyers in the market, at least at the price or close to it that the seller needs.

Real estate securities are traded on stock exchanges though, so one may move in and out of a position in an instant. This may be due to wanting to cash in your investments, to simply get out of the real estate market, or for any other reason. Just like any stock, you simply place an order to sell, which becomes filled in a matter of seconds, not the months or longer it takes to sell a property typically.

With real estate securities, this can provide investors with the ability to own real estate without many of the risks involved. There are of course risks in any investment, although by buying securities, many of the risks that normally apply to real estate investing are reduced or eliminated.

Real Estate Companies Have Many Advantages over Individuals

By buying a piece of a real estate company or real estate investment trust (REIT), individual investors don’t have to worry about such things as coming up with large amounts of capital to both purchase and maintain properties.

Real estate companies specialize in large projects, such as shopping malls and large residential complexes, the sort of thing that is well out of reach of the vast majority of investors. These projects require very large amounts of capital, as well as a lot of management expertise, things that individuals simply do not have access to.

By having what amounts to fractional ownership in these companies, individuals can reap the benefits of large scale real estate investments while at the same time only devoting and exposing themselves to whatever amounts they may be comfortable with.

This is a lot like buying shares of a large company, where one would be far from being able to go into business for themselves in a given sector, for various reasons, the most important being they could simply not raise anywhere near enough money to even start a modestly sized company.

Instead though, you could buy stock in whatever company you want, including industry leaders with a very long track record of success in their industry. You could invest anywhere from a very small amount to a very large one, whatever amount you want. Real estate securities provide investors the same opportunity, in the real estate industry.

Even very small investors can get involved in real estate investing these days, and due to the way that most real estate companies are structured, there are some real tax advantages in this. REITs are set up in such a way as to avoid paying corporate tax on their profits, and although investors do have to pay tax on the dividends they earn, this is seen as a clear benefit to a REIT’s shareholders, as less tax will be paid overall under this scheme.

Not all public real estate companies are set up as real estate trusts, and the percentage does differ depending on the country where the real estate company is located, but many are structured this way.

Real Estate Securities for Diversification

Real estate in itself has several features that make it appealing to a lot of investors, at least as far as having a certain percentage of one’s portfolio allocated to real estate investments.

Unless one is of very significant means, a real estate component of one’s portfolio will almost always mean buying and holding real estate securities. This takes away some of the inherent disadvantages of real estate, its lack of liquidity and its leverage exposure.

Real estate companies are well positioned to manage the risks inherent with real estate investing, although these risks aren’t eliminated and all business risk gets passed on to shareholders of course.

One should not put too high of a percentage of one’s portfolio in real estate, as this would place one too much at risk to the fluctuations of the real estate market, which is quite cyclical. These companies mostly rely on income from commercial real estate leasing, which will go up and down with the business cycle.

Given that a lot of these arrangements are long term though, there is less of a correlation with the business cycle with real estate companies than with the stock market in general. Real estate securities also tend to be bought and held longer term than with stocks in general, meaning that they are less subject to market risk fluctuations, for instance when people move out of stocks and into other types of investments.

Market risk is still present with any type of stock though, but if you have money in real estate, you can reduce this risk somewhat. This all should be balanced with other asset classes, such as bonds and precious metals for instance, if one seeks to be truly diversified, and therefore hedged sufficiently against market risk.

Real Estate Securities as Income Investments

One of the real distinguishing features of real estate securities is the amount of income they generate. This is particularly true of REITs, as they are mandated to pay out at least 90% of their income to shareholders in dividends.

Real estate securities historically pay out dividends at almost twice as high a rate per dollar invested compared to other stocks, making them more like a bond than a stock, even though they do consist of shares and are fractional ownership of company equity, unlike bonds which are debt instruments.

Bonds are known to be more stable and also pay out more income, and real estate securities share these benefits, without the same exposure to interest rate risk that bonds have. Bonds are particularly exposed to inflation risk, where real estate securities are actually a hedge of sorts against inflation risk.

Part of the reason for this is that the assets of a real estate company, the real estate itself, will appreciate along with inflation, where with bonds, inflation causes them to depreciate. With real estate, the income that the real estate generates is also tied to inflation generally, for example, provisions in rent or lease payments allowing them to be increased as inflation rises.

This serves to protect the income generated by real estate, where investors can count on a certain amount of money coming in each year from their investments, in a way that you really can’t with other types of stocks.

This all makes real estate securities particularly appealing to those who are looking to add a significant income component to their portfolios, perhaps someone who is retired and is looking to live off the income of their investments to a large degree. Traditionally, these individuals would mostly hold bonds, but real estate securities also represent a viable option and choice and both should be considered in these circumstances.

Deciding on Whether to Invest in Real Estate Securities

Real estate securities aren’t just for those who are seeking income from their investments, as these securities also appreciate in value like all stocks do, although that part of it is muted by the fact that they pay out almost all of their income to shareholders and therefore don’t grow the companies as aggressively as they could if this were not the case.

One of the biggest reasons why people invest in real estate in general is the long-term stability of real estate holdings, where they can be expected to appreciate in value over time regardless of changing circumstances. This cannot be said about businesses in general, as they must adapt to changes or suffer the consequences, and some adapt better than others.

It’s not that it doesn’t take a lot of skill and foresight to manage a public real estate company over time, but regardless of the way the market’s needs may change over time, we will always need real estate space, to live, to shop, to work, and for any other purpose involving private physical space.

With so much money on the line though, real estate companies do attract the kind of talent that can be counted on to manage their businesses, although this is less of a priority than you see with businesses in general, who have to maintain their business advantages through constant ingenuity.

The purchase of the real estate itself and the existing arrangements go a long way to ensure that a real estate company’s holdings will perform fairly well over time though, and that is a noteworthy advantage.

By buying into this, investors can own a piece of a nice setup which can not only hold its value pretty well over time, but provide some nice dividends each year along the way.



Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.

Contact Monica: [email protected]

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