Why Real Estate Security Tokens Are Better Than REITs
REITs (Real Estate Investment Trusts) are a great way to invest in properties with a small budget. At least in other countries. How good are REITs in Germany? 🤔
- While other countries allow both public and private REITs, REITs in Germany must be publicly traded.
- Leverage is what makes real estate super profitable. In Germany, a maximum leverage of 45% is allowed for REITs.
- There are also restrictions on investments in residential real estate. E.g. REITs may only invest in buildings completed after 2007.
- German REITs are not allowed to buy properties, renovate them and then sell them. They are required to invest passively.
- REITs in Germany cannot earn with interest. They must earn at least 75% directly from real estate.
- While the return on the German real estate market is quite high, the return of the German REIT index is quite low.
Why Real Estate Security Tokens Are Better Than REITs
Our readers are very interested in REITs, Real Estate Investment Trusts, and rightfully so. REITs are awesome if you want to invest in real estate but don’t have the money to buy a property on your own. The issue is that Germany took the very cool concept of REITs from the US and Germanized it with a lot of unnecessary regulations.
Let’s learn more about REITs in Germany in this GermanReal.Estate FAQ. We are not going to go over the concept of German REITs again because we already covered that here. In this article, we want to focus on the rules that regulate REITs in German law (in the Gesetz über deutsche Immobilienaktiengesellschaften mit börsennotierten Anteilen).
German REIT law regulates REITs to the absolute maximum. This is the reason why REITs in Germany are not as great as they are in the US. Here are 5 aspects of German regulation that make REITs in Germany an unattractive investment vehicle.
Rule #1 German REITs Must Be Publicly Traded
German REIT law demands that REITs in Germany have to be publicly traded companies. Other countries allow both public and private REITs, but Germany doesn’t. This is a huge shame because there is usually one big reason why companies go public – To get money from investors. But you don’t need to go public for that!
Going public here in Germany takes ages and costs a lot of money. You need a Supervisory Board, admission to the Stock Exchange, a roadshow, annual shareholder meetings, and an investor relations department. All of which costs a lot of money. Who do you think pays for all of this? Investors, of course! According to Professor Wegmann, the process of going public alone, not all the running costs we just talked about, only the process of going public, costs between 6% to 12% in fees. We are talking about millions of Euros that are not in the investors’ pockets.
Our Real Estate Security Tokens are issued in a private process, which costs not even 10.000€. Lower costs mean a higher return for you! That’s just one reason why we are convinced that Real Estate Security Tokens are a better investment than REITs. If a REIT invests in the same property as we do, they have to spend millions, and we only have to spend a few thousand Euros. This is a huge benefit for investors, so check out our GermanReal.Estate Marketplace if you want to see investments that are currently available.
Are you convinced of the advantages of real estate security tokens? Then go to our marketplace.
Rule #2 German REITs Are Allowed Maximum 45% Leverage
What separates real estate from all other investments out there, and makes it super profitable? Leverage! Let’s be real here, if mortgages didn’t exist, nobody could afford to buy a property in the first place, and real estate would be a pretty bad investment. Leverage turns good deals into great deals!
Let’s imagine you buy a property for 100.000€, and you only cover the closing costs of around 10% with no down payment. If the property rises in value by just 10%, you have doubled your money. Unfortunately, German REIT law allows REITs to leverage only 45%. The other 55% has to be equity. Equity, of course, is money that comes from the people investing in the REIT.
Would you invest in real estate if the bank demanded a 55% down payment from you? We wouldn’t because it makes the entire business case pretty bad from a return on investment perspective. That’s another reason why Real Estate Security Tokens are the superior product. We can leverage at whatever level we want, whatever makes the most sense to maximize returns for investors.
Rule #3 German REITs Face Restrictions When Investing In Residential Properties
Leveraged or not, REITs invest in properties, but German REIT law has restrictions for this too. When it comes to plots, infrastructure, and commercial properties, REITs can basically invest in whatever they want. When it comes to residential properties, the heart of real estate investments, REITS are only allowed to invest in properties built after 2007.
Why is that? The government thinks that rents in Germany would increase even more if REITs would be allowed to invest in older properties. Whether or not that is a correct assumption is an entirely different topic, but the point is if REITs don’t follow these rules, they will lose their REIT status. If you check when the majority of properties in Germany were built, German REITs are only allowed to invest in 10% of properties in Germany, maybe 7% to 8%. So, only a tiny fraction of the German real estate market. This is another reason we think Real Estate Security Tokens are better. Nobody from the government controls what type of property we are investing in, it just has to make sense for investors.
Rule #4 German REITs Must Invest Passively
Many of you are interested in Fix and Flip investing. You buy a crappy shack in a great location, renovate it, and sell it again at a higher price or rent it out afterward. GermanReal.Estate is currently working on a Fix and Flip Real Estate Security Token that would give investors a 7% fixed interest rate plus a 7.5% profit share when the property is sold after the renovation.
REITs in Germany are not allowed to do this. REITs have to focus on passive real estate management only. They are not allowed to trade properties. German REITs can shift their portfolio only once every 10 years. If they buy and sell more often, they lose their REIT status.
Rule #5 German REITs Must Earn At Least 75% Directly From Real Estates
In other countries, you have mortgage REITs that earn money from interest. That’s not really allowed here in Germany either. German REIT law demands that at least 75% of the earnings, and the assets must come from real estate directly. Earning interest from giving out mortgages is not a direct real estate activity according to German REIT law, it is only a real estate-related activity. This is a shame because that would be a good opportunity to make money for investors with the increased interest rates that we’re currently having.
Our real estate securities are nowhere near as heavily regulated as REITs.
Return Of The German REIT Index
We don’t want to criticize REITs too much as they’re a great way to invest in real estate with very little money. At least, this is true in other countries. Here in Germany, the government has regulated REITs so much that it’s almost impossible for them to make a profit. As proof, while property prices in Germany have gone up by about 12% per year over the last few years, the German REIT Index is down by -17% since its inception more than 15 years ago! How is it even possible??? The REIT Index should have tripled or doubled at the very least, but all German REITs have done is lose money for investors. That is the reason why Real Estate Security Tokens are better than REITs!