Free float

Free float - In the real estate context, free float refers to the portion of a real estate company, real estate fund, or real estate corporation that is publicly traded and not held by major shareholders, strategic investors, or management. For publicly traded real estate companies (e.g., REITs), free float is a measure of the stock’s tradability and influences its inclusion in stock market indices.

Significance for Real Estate Corporations and REITs

For publicly traded real estate companies and REITs (Real Estate Investment Trusts), free float is a key criterion: To be included in the DAX or SDAX, at least 10% of the shares must be in free float. REITs under the REITG must even have a free float of at least 15%-no single shareholder may hold more than 10% (Section 11 REITG). A high free float increases the liquidity of the stock, lowers trading costs, and makes the stock more attractive to institutional investors. Conversely, a low free float can lead to high price volatility and limited tradability.

The free float is also crucial for index inclusion: index funds and ETFs that track a real estate index must automatically adjust their portfolios when a company is added or removed. A high free float ensures that these rebalancings can occur without significant price impacts, which provides institutional investors with certainty.

For retail investors, free float is an underrated quality indicator: A real estate corporation with a high free float typically has more analysts monitoring the company, more press coverage, and more transparent pricing. This makes it harder for management to manipulate the share price through selective disclosure-an important safeguard for investors.

Free Float in Real Estate Funds

In the case of open-end real estate funds, there is no free float in the traditional sense, as the shares are not traded on the stock exchange. For closed-end real estate funds whose shares are traded on the secondary market (e.g., Fondsbörse Deutschland), free float plays a role in tradability. For real estate GbRs and KGs with few shareholders, free float is naturally zero-the shares are illiquid and can only be transferred through individual negotiation.

For private investors, liquidity is a crucial difference: Those who invest in a publicly traded real estate corporation with a high free float can buy and sell their shares daily. Those who invest in a closed-end fund are often locked in for years-the secondary market is narrower and less transparent.

Open-end real estate funds are also subject to a minimum holding period of 24 months and a 12-month notice period (since the KAGB 2013). This regulation was introduced to prevent the mass redemptions that had driven several funds into a liquidity crisis during the 2008/2009 financial crisis. Those who need short-term flexibility are better served by publicly traded REITs or real estate corporations with a high free float.

Tax Treatment of Dividends from Free-Float Holdings

A relevant but often overlooked aspect in practice is the tax treatment of dividends from free-float holdings. For corporations, the following applies: Dividends from holdings of less than 10% (free-float dividends) are fully subject to corporate income tax, while 95% of dividends from holdings of 10% or more are tax-exempt (Section 8b of the German Corporate Income Tax Act (KStG)). For private investors, these corporate income tax rules do not play a direct role-they are subject to a 25% withholding tax plus the solidarity surcharge. For institutional investors, however, the ownership percentage is an important tax optimization parameter when building real estate portfolios.

Practical Tip for Owners in Nuremberg

We recommend that investors in the Nuremberg metropolitan region who wish to invest in listed real estate stocks or REITs consider free float as a criterion when selecting stocks. Companies with a free float of less than 20% can be difficult to trade-especially for smaller real estate companies (small caps), which can experience wide bid-ask spreads and price jumps that do not reflect the actual real estate value.

For long-term real estate investments, companies with a free float of at least 30-50% and a market capitalization of over 500 million euros are recommended. Alternatively, unlisted regional real estate investments-such as stakes in project developments in Nuremberg and Franconia-offer a direct connection to the local market but require careful due diligence and a longer-term commitment of capital.

Frequently Asked Questions

Why is free float important for investors?

A high free float means that the stock is easily tradable: You can buy and sell at any time without significantly affecting the price. With a low free float, a single sale can significantly impact the price-which increases the risk for retail investors. Additionally, a high free float ensures fair pricing, as more market participants are involved in trading. This is particularly relevant in the real estate sector because real estate values appreciate slowly, and a volatile stock price can distort the picture.

What happens if the free float becomes too low?

If the free float falls below the minimum threshold for stock market indices, there is a risk of index delisting-the stock will be removed from the DAX, MDAX, or SDAX. This leads to selling pressure from index funds that are no longer allowed to hold the stock. For REITs, a free float that is too low can lead to the loss of REIT status, which entails tax disadvantages (loss of tax exemption at the corporate level). In both cases, the price decline can be significant-a risk that investors should be aware of.

Are there any publicly traded real estate companies in Nuremberg?

No major publicly traded real estate companies are headquartered in the Nuremberg metropolitan region. The relevant German real estate companies (Vonovia, LEG, TAG, Deutsche Wohnen) are based in other cities, but some of them own properties in Nuremberg and Franconia. For regional investments, unlisted investments in project developments or closed-end funds are suitable options-these have no free float and are correspondingly illiquid. The due diligence requirements are higher than for listed securities.

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