Investments in real estate can take place in several different ways. The advantage of properties is, among other things, that they provide inflation hedging, risk diversification, and stable returns at relatively low risk. Let’s check these out! This, among other things, by directly owning them, investing in real estate companies, or lending money to real estate companies.
The Chosen Path
Which path is chosen determines both the risk level and the expected return? The different paths can be categorized based on the points below. These points are often combined, but primarily the return comes from one of these:
- Income and value increase on the property – Direct ownership, Shares, Funds, ETFs
- Only increase in value on the property – Own your own home
- Capital injection: Loans, Crowdfunding
#1. Own Properties – Direct Ownership
- Requires significant capital and knowledge
- Mainly real estate companies that own
- Should take place in the company form
Owning and renting out properties is a way to return. On the other hand, it requires both a large amount of capital and a certain amount of knowledge about property management. It is possible for those who do not know/have time to buy into financial management and property management. Few private individuals own, manage and make money on real estate. This is precisely because of the more considerable capital required.
#2. Direct Ownership in Rental Properties
- The total return of 6 – 9%
- Low correlation with the stock market
- Investment outside the big cities
SBF offers investment in Swedish rental properties. The company raises capital from both private individuals, companies, and institutions. The shares can be bought/sold on an open market (NGM) but can also be redeemed every five years. Redemption then takes place at the current net asset value. SBF aims for investments in their fund to provide 6-9% total return. However, the minimum amount to invest is often high. In an issue at the beginning of 2021, the minimum amount was SEK 120,000. SBF is thus an easy way to invest directly in rental properties only. In addition, with the advantage that the shares can always be redeemed at net asset value.
#3. Shares – In Real Estate Companies
Owning shares in real estate companies creates indirect ownership in real estate. With good value development on the companies’ properties, the company will also (most often), and the share will increase in price. The focus of these companies can vary greatly. For example, Diös mainly invests in “urban development” in Norrland, while Hufvudstaden especially has office properties in Stockholm and Gothenburg. It is thus possible, for example, to choose real estate companies based on focus, geography, historical direct return, or loan-to-value ratio. During specific periods, the return has been very high.
An example is shown below from the period 2018 – 2021. During this period, the average return was 66.67%, according to Avanza. In other words, over 20% per year. A significant advantage of investing in real estate via shares is that you do not need to be well versed in the real estate market. This knowledge is instead found within the company in which the investment takes place. Each company owns a large number of properties – which provides risk diversification. By then investing in several different real estate companies, further risk diversification is created. A disadvantage, however, is the company risk. It is thus not certain that a hot real estate market will be reflected in a higher share price.
#4. Preference Shares in Real Estate Companies
- Fixed return per year
- Priority for share dividends
- Lower risk than with ordinary shares
Preference shares in real estate companies provide a stable annual return. Companies can issue preference shares if they need capital. This with the promise of a higher share dividend than what ordinary shares had during that year. These shares pay dividends at a predetermined level. Thus, the price is not affected by the real estate company’s financial development as the ordinary shares. Dividends on preference shares are also prioritized before dividends on common shares. In the event of poorer economic growth, this may mean, for example, that only the preference shares receive dividends. Should the company not pay a dividend at all, this is generally counted as the amount outstanding. Thus, a more considerable amount needs to be paid in share dividends to the preference shares before the ordinary shares receive a dividend. The value is affected by both the percentage expected dividend and the interest rate situation in the country. If the interest rate rises, it will harm the price of ordinary shares. It is also important to remember that the preference shares do not follow the share price as the dividends are calculated in entirely different ways.