Regulated Real Estate Companies (REITs)

An investor who wants to acquire, in a single step and with a relatively modest initial outlay, a highly diversified real estate portfolio would do well to consider buying shares in one or more regulated real estate companies, or REITs.

The Brussels Stock Exchange currently hosts several such companies, all of which—except for the tiny Immo Moury—boast real estate portfolios valued between €200 million and over €3 billion. Some are specialized in specific real estate segments, such as office buildings, residential properties, retail spaces, or semi-industrial buildings, while others adopt a more diversified approach, investing simultaneously in various types of real estate. While the majority of these REITs’ investments remain concentrated in Belgium, many are increasingly expanding into neighboring countries (the Netherlands, France, Germany, and Luxembourg), with a few even venturing as far as Romania, Switzerland, or Spain.

REITs are subject to strict regulations. They must have their real estate portfolios appraised four times a year by an expert, and their debt ratio cannot exceed 65%, although the in-house bankers for these companies are often even stricter on this point. Additionally, REITs are required to distribute at least 80% of their profits as dividends to shareholders each year. Finally, no single property can represent more than 20% of the portfolio’s total value.

These real estate companies were previously known as “Sicafi.”

Testachats, Sociétés immobilières réglementées, 15/11/2016

(FSMA, Sociétés immobilières réglementées, 10/2024, https://www.fsma.be/fr/societes-immobilieres-reglementees)

In Belgium, the basic rate of withholding tax is 30% of income. Depending on the type of income, reduced rates apply

https://finances.belgium.be/fr/entreprises/impot_des_societes/Precomptes/precompte-mobilier#q2

If the share is composed of more than 60% healthcare real estate and benefits from a Belgian withholding tax of 15% instead of 30% on dividends paid to individuals.

For example: Aedifica, Care Property Invest

https://www.test-achats.be/invest/fiscalite-et-droits/taxation/news/2018/11/immobilier-sir-sante-precompte-mobilier-reduit-15

Several Selection Criteria

The criteria to consider when choosing a real estate investment company are numerous. Here are the main ones:

An important aspect is the premium or discount of the stock price relative to the intrinsic value of the REIT (Real Estate Investment Trust). This represents the actual value of the company, calculated as the value of all its assets—more specifically, the value of its property portfolio—minus its liabilities. It’s generally better to favor REITs trading at a discount or a slight premium of no more than 20%. A higher premium increases the risk of a price drop in the event of declining property values or, worse, a real estate crisis.

A second criterion to consider is the net dividend yield. Residential real estate typically offers the lowest rental yield, while semi-industrial or logistics real estate tends to be the most lucrative. Since rental income is the primary revenue source for REITs, this often translates into dividend yields. Currently, a net dividend yield of 3–4% is common. Significantly higher yields may result from very low or falling stock prices, potentially signaling that the REIT is facing challenges or entering a difficult period (e.g., high vacancy rates, expected rent declines, etc.).

It’s also important to monitor the payout ratio closely. Although REITs are legally required to distribute at least 80% of their earnings, some go as high as 100%. In tough times, these REITs would likely need to reduce their dividends, while those with a lower payout ratio might retain the flexibility to maintain or even increase their dividends by temporarily raising their payout ratios.

Another key factor is the debt ratio. Lower debt levels give a REIT more flexibility to expand its portfolio without seeking additional capital from shareholders, as it can more easily take on new debt to finance acquisitions. Conversely, REITs with higher debt levels can offer shareholders higher returns on equity through leverage. The goal is to strike a balance between debt and equity usage, with a debt ratio that is neither too high nor too low. A debt ratio of 30–45% is often considered a good compromise in most cases.

Of course, the real estate portfolio itself is another critical element in choosing a REIT. It’s generally preferable to invest in a company with higher-quality properties. While rental yields—and thus dividends—may be lower, this is often offset by capital gains on property sales in the long run. The prospects for the real estate sector and the property locations are also key considerations. For example, one should evaluate whether rents for the properties in the portfolio can be increased or whether occupancy rates can be maintained or improved.

Finally, interest rates are another important factor to consider. Rising interest rates negatively impact the earnings and stock prices of real estate companies. The higher the interest rates, the higher the financing costs for a REIT. However, some REITs partially hedge against rate fluctuations.

When rates rise, REIT dividend yields become less attractive compared to fixed-income products like savings accounts, certificates of deposit, or bonds. Investors may then shift towards these products, potentially neglecting REITs. Ultimately, this decreased demand could put downward pressure on REIT stock prices.

Testachats, Sociétés immobilières réglementées, 15/11/2016