Investing in real estate stocks

Here are some pros and cons to investing in residential, commercial and industrial real estate.

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Since the COVID-19 downturn, property markets have been on a boom, with the gains partly driven by tightening stock levels and exceedingly low mortgage rates.

In countries such as Australia, this boom has seen the price of property skyrocket nearly 20% nationally in just 12 months.

For investors who are bullish on the sector but do not want to own property themselves, they can invest through real estate shares.

There are 3 segments of the real estate sector and multiple ways to invest in real estate stocks, each with its own benefits and risks.

What are real estate stocks?

The real estate sector consists of stocks from companies that own, develop and manage properties. The Global Industry Classification Standard defines 11 stock sectors, each characterised by a specific industry or slice of the market.

The real estate sector can be further broken down into residential, commercial and industrial real estate. Some real estate companies and trusts specialise in buying only one type of property while others manage multiple segments of the sector.

Ways to invest in real estate sector stocks

The real estate sector is dominated by real-estate investment trusts (REITs). These pull the resources of investors together to buy a range of property assets, which the trust then manages for a profit. In most instances, they generate most of their income through rent, returning the majority back to shareholders through dividend payments.

REITs are publicly traded trusts that are bought and sold like stocks.

They offer the opportunity to participate in real estate an Australian investor might otherwise not have access to, like shopping malls and business parks.

Those looking to explore the real estate sector can invest in REITs or real estate ETFs.

Invest in REITs

If you’d prefer to invest in individual real estate companies, REITs can be bought and sold through a brokerage account in Australia.

Most trading platforms come with research and analysis tools designed to help you compare and select investments across sectors. Stock screeners can help you narrow your options to investments available in the real estate sector, listing real estate companies and REITs alongside key metrics to help you assess your options.

Pros

  • Support individual companies. Investing in REITs gives you the opportunity to back individual companies and trusts based on your interests, values and investment goals.
  • Highly liquid. Unlike buying and selling physical property, you can swap REITs online in a matter of minutes.
  • Dividends. Like stocks, REITs pay dividends, which can act as a source of income.

Cons

  • Limited exposure. To compete with the broad selection of securities available through a single ETF, you’d have to purchase many individual stocks.
  • Volatile. REITs are easily influenced by interest rate fluctuations, making them inherently more volatile than ETFs.

Compare real estate stocks

Invest in real estate ETFs

An ETF, or exchange-traded fund, is a bundle of securities that track a specific stock sector or market index.

Real estate ETFs track REITs and indexes for the real estate market. Instead of purchasing a single stock, ETFs offer access to a collection of stocks in a specific stock market sector, providing more comprehensive exposure.

Like stocks, ETFs can be bought and sold through a brokerage account. When you purchase an ETF, you pay an expense ratio: an annual cost expressed as a percentage of the funds invested and can range from 0.03% to 2.5%.

A popular ETF in the real estate sector is SPDR Dow Jones Global Select Real Estate Fund (DJRE)

Pros

  • Low risk. ETFs are less risky than stocks because they’re a collection — not a singular entity. The diversity of ETFs helps safeguard the fund from potential losses.
  • Portfolio diversification. Buying into an ETF broadens your portfolio with a single purchase.

Cons

  • Lower dividends. Dividends from an ETF may have trouble competing with high-yield stocks.
  • ETF fees. While it’s possible to swap stocks commission-free, ETFs carry expense ratios that are typically unavoidable.

How is the real estate sector performing?

The stock market is in constant flux, and individual stocks can change prices second by second. But you can use the performance of ETFs to gauge the average performance of a stock market sector over time. The graph below tracks the SPDR Dow Jones Global Select Real Estate Fund (DJRE).

Why invest in real estate stocks?

Real estate stocks and ETFs typically offer dividends which act as passive income.

Better yet, real estate assets tend to be viewed as a stable investment, as they’re backed by physical property and often have long-term contracts or lease agreements, which can stabilise incoming cash flow.

Real estate investments can diversify your portfolio, while hedging against inflation. By investing in real estate stocks or funds, you own a piece of a tangible asset without purchasing and maintaining the property firsthand. It’s a practical option for Australians who want to diversify their portfolio with real estate but don’t want to own their own property.

What unique risks does the real estate sector face?

The profitability of the real estate market is closely correlated with occupancy rates and property values. If property values fall, so will share prices.

REITs also tend to be more volatile than physical properties, so while you benefit from having the property managed on your behalf, you also take on more risk.

Compare online brokers

If you want to buy stocks or ETFs in the real estate sector, you'll need to start by opening a brokerage account in Australia.

Name Product Standard brokerage fee Inactivity fee Markets International
eToro (global stocks)
US$0
US$10 per month if there’s been no login for 12 months
Global shares, US shares, ETFs
Yes
Zero brokerage share trading on US, Hong Kong and European stocks with trades as low as $50.
Note: This broker offers CFDs which are volatile investment products and most clients lose money trading CFDs with this provider.
Join the world’s biggest social trading network when you trade stocks, commodities and currencies from the one account.
IG Share Trading
$8
$50 per quarter if you make fewer than three trades in that period
ASX shares, Global shares
Yes
$0 brokerage for US and global shares plus get an active trader discount of $5 commission on Australian shares.
Enjoy some of the lowest brokerage fees on the market when trading Australian shares, international shares, plus get access to 24-hour customer support.
Superhero share trading
$5
No
ASX shares, US shares
Yes
Earn up to 15,000 Qantas frequent flyer points when you transfer an exisiting balance or trade. Offer valid for all new and existing Superhero members until 28 February.
Pay zero brokerage on US stocks and all ETFs and just $5 (flat fee) to trade Australian shares from your mobile or desktop.
ThinkMarkets Share Trading
$8
No
ASX shares
No
Limited-time offer: Get 10 free ASX trades ($0 brokerage) when you open a share trading account with ThinkMarkets before 31 December 2021(T&Cs apply). $8 flat fee brokerage for CHESS Sponsored ASX stocks (HIN ownership), plus free live stock price data on an easy to use mobile app.
Bell Direct Share Trading
$15
No
ASX shares, mFunds, ETFs
No
Finder Exclusive: Get 5 free stock trades and unlimited ETF trades until 31 Dec 2021, when you join Bell Direct. T&Cs apply.
Bell Direct offers a one-second placement guarantee on market-to-limit ASX orders or your trade is free, plus enjoy extensive free research reports from top financial experts.
Saxo Capital Markets (Classic account)
$5
No
ASX shares, Global shares, ETFs
Yes
Access 19,000+ stocks on 40+ exchanges worldwide
Low fees for Australian and global share trading, no inactivity fees, low currency conversion fee and optimised for mobile.
CMC Markets Invest
$11
No
ASX shares, Global shares, mFunds, ETFs
Yes
$0 brokerage on global shares including US, UK and Japan markets.
Trade up to 9,000 products, including shares, ETFs and managed funds, plus access up to 15 major global and Australian stock exchanges.
SelfWealth (Basic account)
$9.5
No
ASX shares, US shares
Yes
Trade ASX and US shares for a flat fee of $9.50, regardless of the trade size.
New customers receive free access to Community Insights with SelfWealth Premium for the first 90 days. Follow other investors and benchmark your portfolio performance.
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Compare up to 4 providers

Important: Share trading can be financially risky and the value of your investment can go down as well as up. Standard brokerage is the cost to purchase $1,000 or less of equities without any qualifications or special eligibility. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.

Bottom line

The real estate sector offers the opportunity for stable dividends backed by physical assets but isn’t immune to risk. Australian investors should be wary of shifting property values and occupancy rates before they invest.

Research your trading platform options to find the brokerage account best suited to your needs.

Frequently asked questions

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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