Real Estate – Investors' Academy

Investing in Real Estate?

Investing in real estate can be done in different ways, with different characteristics and risks.

For example, you can choose to invest directly in real estate by purchasing land or a building. To spread your risk, you can invest in different real estate types such as offices, houses, apartments, etc. or in different countries.

You can also invest indirectly in real estate by purchasing ETFs (trackers), real estate certificates (comparable to a bond), real estate shares or funds that invest in real estate. Below we will only go deeper into the indirect way of investing in real estate.

General characteristics of indirect investment in real estate

Maturity:
Usually amounts 20 to 25 years (depreciation period of a building) for real estate certificates. Upon sale, the certificate ends immediately and a capital gains tax is possible. There is no fixed maturity for ETFs, shares or funds.
Coupons (real estate certificates):
Just like a bond, you receive a coupon each year (rental income and share redemption of the capital). The rental income fluctuates along with the index.

Indirect investment in real estate: the risks

Below we have briefly summarized the main risks of indirectly investing in real estate:

Credit risk:
When a company or institution can no longer pay back the real estate certificate, share or ETF. This credit risk depends on the company or institution's creditworthiness.
Liquidity risk:
An ETF in real estate or a real estate share is highly liquid, which makes the liquidity risk low. A real estate certificate, on the other hand, is not traded often, which makes the liquidity risk higher.
Market risk:
You don’t invest directly in real estate, but in real estate certificates or ETFs. The underlying asset cannot be predicted as it is subject to exchange rate fluctuations. The risk of a loss in value, however, is real and varies according to the investment. The greater the diversification within the investment, the lower the risk. The price volatility risk is also significant and depends on the evolution of the property market in general, the quality of the assets in the investment vehicle, the quality of the management, the extent to which the property is rented out, the evolution of interest rates, etc.
Return risk:
The return on real estate certificates or ETFs is uncertain as they depend on both the net income and the capital gain or loss on the sale of the underlying real estate. The risk that property prices will stagnate or decline always exists.
Interest rate risk:
The risk of market interest rates also plays a role. Rising market interest rates result in a decrease in the value of the certificate or ETF and vice versa.

Costs & Taxes on indirect investment in real estate

Tax on stock exchange transactions:
Tax that applies to the purchase and sale of real estate certificates, shares and ETFs on the secondary market.
Brokerage fee:
The cost of executing orders on the secondary market.
Custody fee:
The cost of holding a certificate or ETF in a securities account.
Withholding tax on interest (real estate certificates):
In Belgium, withholding tax is levied on interest received. With real estate certificates, the net rental income is considered to be part of the interest. The portion of the repayment (repayment of capital) remains untaxed. ETFs that distribute dividends are also subject to withholding tax.
Capital gains tax:
This applies only to the sale of the property. If more than 10% (25% for purchases before 1 January 2018) is invested in debt claims in an ETF, the capital gain is taxed at the withholding tax rate (also known as Reynders tax).