REIT ETFs - A Swiss Investors Perspective


#1

I see there has been discussions about real estate but not really so much ETF REIT’s (Real Estate Investment Trusts). From my perspective I see them playing a small but not insignificant role in a balanced portfolio. I would like to include a REIT ETF fund in my portfolio if it makes sense for me.

Ideally I would have liked to place around 10-15% of my portfolio into REIT funds but I’m also uncertain whether this is actually a wise decision for the Swiss investor paying Swiss taxes. As REIT’s are legally obliged to pay out most of their gains in the form of dividends/income rather than growth I see this as an issue for Swiss investors, having gains eaten away by tax. Compared with other investments I am concerned that too much of any gain in investment will be taxed away?

Questions:
Is there a specific type of REIT that makes more sense to the cost/tax concerned Swiss investor? For example Mortgage or Equity REIT?
Do others on this forum think that a REIT ETF should play a role in a Swiss investors portfolio or are the tax costs too high?
What sort of % loss of gains would be taxed away due to income tax? Presumably this is related to my own personal circumstances and income level.
If a REIT etf belongs in a Swiss investors portfolio should it be global, region or country specific?
Is there any positive advantage to the high capital gains tax paid on the REIT? (capital losses will also be “taxed” in this manner so perhaps somewhere in a bad year they could be useful! - obviously we all hope/expect our investments to go up in value though!)

Interested in the forums perspective on REIT ETF’s!


#2

First of all start your reading with this one:

http://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/


#3

Hi Fletcher,

I think (but did not check) that the distributed income of a REIT ETF would be considered a dividend and therefore subject to the 35% tax leaving you with 65% minus transaction fees to reinvest.
In the accumulation phase I am personally staying away from high yield investments and taxable events.

In the passive income phase I’d probably consider REITs if:

  • it is sufficiently uncorrelated against my other investments
  • I need a specific income yield that other investments can’t provide

#4

High dividend paying investments are generally a bad idea for private swiss investors, especially for the higher earning ones, because that dividend is fully taxed as income, unlike tax free capital gains.

Also, if you’re thinking of buying US REITs, you’re exposing yourself to higher currency risks - these companies earn 100% of their income in USD, unlike, for example, S&P 500 companies which derive about half of their earnings from abroad and so are much more global in their nature.

Your marginal income tax rate. For example, a single well earning individual in city of Zürich would cough up roughly 40% of dividends in taxes, and even more if you pray to a wrong church.

To put that into perspective when you read financial advice from US centric websites: US taxpayers pay about only 15% on long term capital gains and dividends, and have access to tax optimization vehicles like 401k and IRA plans, which are much much more flexible than pillar 2/3a system here.

Tax is less, halved or so, if you would own >10% share of a swiss company, as you can then benefit from reduced dividend taxation privilege - it can be roughly at the level of direct ownership or maybe even somewhat better if company is well located, plus the company is allowed to write amortization/depreciation off its taxes, unlike direct natural owner.

For swiss real estate, the hierarchy of yields looks roughly like this, in increasing order of profitability:

  1. publicly traded real estate funds - http://www.immofunds.ch/index.php/de/analysen. Highly diversified, highly liquid, hassle-free real estate investment for anyone, with very low dependence on mortgage rates, very low capital requirements - you can invest as little as want, but low yielding, expect 2-4% dividend and capital gains according to state of the market. No capital gains tax.
  2. crowfunding (e.g. crowdhouse.ch): yield in the middle between funds and direct ownership, hassle free (third party company manages everything), medium capital requirements, but little control as ownership is shared, and otherwise has all or most of the disadvantages of direct ownership.
  3. direct ownership: best yields, you can take full advantage of low mortgage rates, but high risk (single property & mortgage rate sensitivity), high capital requirements, illiquid, sky high transaction costs in some cantons, high capital gains tax, need B EU or C permit to buy, you’re fully in control of the property and need to manage it yourself or hire someone to do it.
  4. ownership through your own company: variation on direct ownership, unlocks some interesting tax optimization potential and reduces your liability. But management is more complicated and worth doing rather for larger properties with multiple apartments. Potentially can be used to avoid capital gains tax on sale with careful planning.

35% is for swiss domiciled securities. For a US-domiciled ETF, it would be only 15% with a proper broker. And this is just withholding tax, once your swiss tax declaration is processed you’ll get billed a lot more. Only if you’re not allowed to file tax return (low earner with low wealth, thresholds are canton specific) would it end at withholding tax.


#5

Thanks to all for your responses and thoughts, particularly to Hedgehog who given a really detailed answer with some good suggestions if we can’t escape REIT style investing.

I think you guys really confirmed in different ways what I didn’t want confirming! That for a Swiss investor a REIT fund is really not a suitable investment.

I know that REITs are similar in some/but different ways to both bonds and equity but I would like something that is a bit different to aid in diversification in my portfolio. Also not owning property myself but hoping to purchase a house one day I thought that this would in some respects match my profile quite well (I know that REITs are generally commercial property rather than residential but…).

On with the search for the perfect portfolio!


#6

I just want to add that the biggest real estate players (like Swiss Prime, the one of the glass tower in zh, that controls a ton of companies like wincasa) are already included in the SLI or SPI or even SMI. So everytime you buy the Swiss index (for instance in the pillar 3a where a certain percentage of stocks must be Swiss) you are already being exposed to the Swiss estate market. Be careful to not overexpose.


#7

It’s not so heavily weighted in the index. I’d be rather much more worried about the 60% or so weight given to Nestle Novartis Roche trio in it


#8

for the nestle-roch-novartis problem, make sure you are aware of the difference between SLI, SPI and SMI.
SLI has the 9% cap which fixes the 60%-problem to some degree. SPI MID circumvents the problem entirely by not including the swiss blue chips, which are in turn contained in any all-world-ETF like Vanguard FTSE all world.

back to topic:
besides what grog mentiones, the swiss real estate funds tend to have 1+% TER :frowning: