REIT ETFs - A Swiss Investors Perspective

Real Estate
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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!

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First of all start your reading with this one:

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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
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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.

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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!

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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.

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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

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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:

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Hi,
In my experience having an ETF with accumulating dividends or distributing dividends does not make any difference as they will be anyway taxed with a 35% tax, the difference is that in the first case you will not even see the money in your pocket, which makes it even more annoying.
Indeed if there are ETFs without dividends ( I do not know any ) or with low dividends, in order for the extra money to be reinvested in the capital, I agree that is a better option as it would be taxed less.
In general REITs are more for people who want to get some earnings from their investments along the way, so that they can get some returns in their pockets.
Please let me know if my understandings is correct.
Cheers
Al

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Hi Mustachians,

For a while I’ve been toying with the idea to buy some Real Estate ETFs.

And I would like to use a Swiss Broker using Swiss domiciled ETFs to do this.

The objective of this non very Mustachian idea would be diversification.

Both in terms of where I keep my investments (I don’t want to keep all my assets in one place, read IB) and also in terms of portfolio allocation (would like to have something different from VT).

It wouldn’t be a high amount of my assets, something like 5-10%.

I also would like to clarify that I don’t own any properties and I’m not planning to buy any.

I’m aware of the higher costs of Swiss brokers, the high TER of these ETFs, the taxation on dividends, etc. but I still think it would be better than having some money parked in a savings account not invested - Or maybe not? Am I out of my mind?

I’d appreciate your thoughts on this.

Some examples I found of Swiss Real Estate ETFs:

CS Real Estate Fund Green Property
CS Real Estate Fund Living Plus
CSIF (CH) I Real Estate Switzerland Blue ZB
UBS ETF (CH) SXI Real Estate® Funds (CHF) A-dis
UBS ETF (CH) SXI Real Estate® (CHF) A-dis
(not done much research yet)

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The first 2 are not ETF but 2 of the 40 available funds on Zürich exchange. They own buildings.

I don’t think these ETFs are good, because of the high fees. I think it is better to buy funds that suits your needs (taxed on the investor side vs taxed on the fund side, residential vs mix vs commercial etc). What’s more, some of the funds included in the ETFs are traded at a premium up to 45% (imagine buying a building that experts said has a value of 1.3M and has a mortgage of 300k, but you buy the package for 1.45M…). Of course if you want to choose your funds, there is 40 annual reports to read (unless you already know you only want residential only or any other criteria)

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I have some shares of UBS ETF (CH) SXI Real Estate® Funds at Cornèrtrader based on similar thoughts. I’m also renting and it’s a much smaller part of my portfolio than stocks. I.e. it’s also for diversification and in a way a hedge against increasing rent (or in case I want to buy my own home at some point after all). While there may be some correlation with the global stock market, I expect it to increase diversification (also with regards to currency).

They are definitely not particularly cheap, although the premium was not quite as high when I bought most of them. Houses are also very expensive on the open market right now (may be higher than an official estimate), i.e. this is not purely an ETF premium.

The ETF TER includes the management costs of the individual REITs. The ETF management fee alone is 0.25%. Directly buying the underlying REITs would save you these 0.25% but you either get less diversification (and have to carefully study which one you want) or you need to buy multiple REITs yourself.

The tax value is 40% below the market value and part of the distribution is tax-free (capital gain distribution). The former means that you save a bit on your wealth taxes, which compensates the ETF fees a bit, depending on your wealth and tax residence.

BTW: The CSIF one is a mutual index fund, not an ETF. This fund is available at VIAC and finpension for pillar 3a. It might be available at Swissquote, although not sure whether it’s available to private investors at all. If it is, it might be better than the UBS ETF.

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I have asked IB to make a CSIF Small&Mid cap fund (CSS1) available and they did so in no time. Just in case.

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I wonder if anyone can share his/her experience in investing fund that tracks the SXI Real Estate® index?

There is actually a whole family for Real Estate indices provided by SIX Real Estate Indices | SIX and each of them probably have Total Return and Price option. For each index there is probably multiple index fund tracking the fund. SIX also provides a file listing our some productions if one invests in the index. https://www.six-group.com/dam/download/market-data/indices/six-index-based-products-en.pdf So basically there is quite a lot of research to be done, but I guess all these options are pretty much the same?

So if you are now investing in one fund tracking one swiss real estate index, which fund is it, which index is it? How did you choose this? Size? Age? Available or not on IBKR?

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A reduced tax value is calculated by the fund and the investor pays wealth tax on it. All elements related to the properties are not taxable.

The fund “Solvalor” is a good example (CH0002785456). The NAV at year end was approx. CHF 270, while the tax value is zero.

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Most of the funds were created after the real estate crisis of the 90’s. Only twelve were created before

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Glad to find this post. Yet I am still a bit confused and/or lost in the selecting process. Would you have some direct recommendation of some funds that tracks the real estate index? And hopefully it is tradable on IB. Thank you so much.

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As far as I know, the only ETF tracking the SXI Real Estate Funds Broad index is the UBS ETF SXI Real Estate Funds: CH0105994401. This should be available on IBKR.

There are also mutual index funds tracking the same index. Swisscanto (CH) Index Real Estate Fund Switzerland indirect FA CHF seems to be available to retail investors at Swissquote but I don’t think IBKR offers Swiss mutual funds. CSIF also has one but it is only available to qualified investors (and e.g. via VIAC/finpension).

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Regarding these tax advantaged RE funds. Do I understand correctly then that the"direct holding" funds are taxed, just on the fund side rather than the investor side?

If so, what’s the rate of tax applied?

If it’s higher than my marginal income/wealth tax then i guess it’s not actually advantageous.

On the other hand if it’s lower then it could be interesting.

Does anyone have more info how this works?

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4.25% for federal tax (art. 49 al. 2 + art. 71 LIFD) + cantonal/communal tax. The total tax is approx. 15%