Real estate is a popular investment option among retail investors as this asset class offers reliable long-term returns and good diversification within a portfolio, but not everyone is sold on the idea of directly owning and managing a physical property.
Investing in real estate through an exchange-traded fund (ETF), typically one that holds Real Estate Investment Trusts (REITs), offers a fundamentally different experience than physically owning and managing a property.
Owning property
Owning physical real estate is an illiquid investment – it ties up capital over long periods, with the return realised on the sale of the property, provided the property has appreciated in value, and the costs of maintaining it haven’t exceeded the profit.
Buying a property also requires significant upfront capital, even if an investor uses a loan as leverage to increase their exposure.
However, direct property ownership does offer complete control over the asset, including rental rates, tenant selection, and improvements, which provides some control over the potential appreciation and creates opportunities to generate cash flow.
Owning property shares
Retail investors looking for exposure to the property sector without the time, capital and cost commitments required to buy and manage a physical property can consider a listed property fund, like a real estate ETF or REIT.
REITs typically invest in and manage income-generating properties, such as office buildings, shopping centres, logistics hubs, hotels, data centres, and healthcare facilities, among others.
These funds offer easy, low-cost, diversified, and liquid exposure to real estate. The financial barrier to entry is low, as investors can buy shares for the price of a stock without the need for a large capital outlay for a deposit or outright purchase.
They also allow the average retail investor to tap into commercial property, like offices or logistics parks, not just residential real estate.
Furthermore, real estate ETFs provide broader diversification benefits, with the option to spread the property portion of any property investment across multiple properties, sectors, and geographic regions.
With a property ETF, a South African investor can easily gain exposure to more robust property markets in other countries, while accessing global trends that are not easily accessible, like the growth in AI infrastructure.
The ability to easily buy and sell shares on an exchange throughout the day, unlike physical property, which can take months to sell, makes these highly liquid investments.
Furthermore, investors can use real estate ETFs as a passive investment, requiring virtually none of the time and effort needed for property management, tenant issues, or maintenance, and they often provide regular income through dividends.
However, investors who choose to gain property exposure via an ETF must remember that the investment is subject to market volatility, which means share prices can fluctuate based on broader market sentiment, not just the value of the physical real estate.
Real estate ETF options
The Clarity, by Investec platform offers a range of real estate ETFs that offer exposure to listed property funds.
The Direxion Daily Real Estate Bull 3X Shares (DRN-NASQ) is a leveraged ETF that seeks daily investment results, before fees and expenses, of 300% of the performance of the Real Estate Select Sector Index (IXRETR) on a single day.
The Vanguard Real Estate Index Fund ETF Shares (VNQ-NASQ) invests in stocks issued by REITs that purchase office buildings, hotels, and other real property. The fund aims to closely track the return of the MSCI US Investable Market Real Estate 25/50 Index.
The Real Estate Select Sector SPDR® Fund (XLRE-NASQ) seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Real Estate Select Sector Index, which aims to provide an effective representation of the real estate sector of the S&P 500 Index with precise exposure to companies from real estate management and development and REITs, excluding mortgage REITs.
