This article is written as part of a DollarsAndSense.sg collaboration with For Tomorrow. For Tomorrow is brought to you by Temasek, in partnership with MoneySmart and DollarsAndSense. All views expressed in the article are the independent opinion of DollarsAndSense.sg.
Many people in Singapore dream of owning private property. The reason for this is simple: We’ve all seen property values soar over the last several decades. We want to invest in an asset that we think will continue appreciating in value over the long-term, while still delivering us passive income in the form of rental in the short-term.
Despite this lucrative prospect, investors here are quickly recognising that it’s becoming harder to invest in the Singapore property market. This isn’t only because of the high property price. There is genuine uncertainty over whether Singapore’s economy can continue growing in the future, as well as the looming prospect that further market cooling measures, similar to the Additional Buyer’s Stamp Duty (ABSD) and the Total Debt Servicing Ratio (TDSR), may be introduced if property prices are seen to be moving ahead of economic growth.
As such, property investors are increasingly looking to invest in the sector via other ways, such as through Real Estate Investment Trusts (REITs).
Investing In Property the Traditional Way
Simply put, when you invest in physical properties, you’re hoping that you’ve found a great property that you can rent out for the next five to 10 years, and possibly, beyond that. Alternatively, some investors may invest in the hope of flipping it for profit if the property market improves.
The expectation is that you only have to fork out the downpayment, as you’ll be able to collect monthly rental income to offset your mortgage. Simultaneously, you also hope that you will continue enjoying capital gains on your property value. If you don’t sell it off, you can also live off the rental returns for your retirement indefinitely.
Investing In Properties Via REITs
When you invest in REITs, you’re taking a slightly different approach. Investing in REITs can be done without a large initial capital outlay and doesn’t require you to worry about physically managing the property or the mortgage.
REITs are listed on the stock exchange and they mainly invest into specific sub-sectors of the property market, such as the industrial and commercial sectors. They also tend to own a large portfolio of properties, which comprise several buildings or sections of buildings.
There are advantages and disadvantages to investing in properties, either the traditional way or via REITs. In this article, we will look at ten areas you should consider.
# 1 Initial Capital Outlay
If you want to invest in a physical property, you have to make a downpayment of at least 20%. This can be quite a hefty sum that many may not be able to cough up.
The benefit of investing in REITs is that you can start off with a much smaller amount. Through a monthly investment plan, you can invest from as little as $100 a month.
# 2 Leveraging Your Assets
When you invest in a physical property, you’re able to get a loan of up to 80% to purchase your property. Of course, this comes with a few caveats, such as complying with the Total Debt Servicing Ratio (TDSR) and Loan-To-Value (LTV) limits.
Leverage can be very powerful as you could be in a position to purchase a property worth $1 million by putting down as little as $200,000. Unused monies in your CPF Ordinary Account (OA) can also be used to partially pay this amount. In addition, mortgage rates in Singapore are currently hovering the 1.7% mark, which makes borrowing money relatively inexpensive.
When you invest in REITs, you’re unable to get as much leverage. Many brokers offer margin financing of between 2.5 times to 3.5 times the value of your stocks. Interest rates are also significantly higher, sometimes up to 6.0%.
Before deciding if one is better than another, you should first consider your personal cashflow situation and risk appetite. While the ability to borrow at a low interest rate may appear as an attractive proposition for property investors, not every investor may be comfortable with leverage.
If you are not comfortable with leveraging, REITs investing may be more appropriate for you. However, if you are comfortable with taking on a loan at a low interest rate, property investing may be more appealing.
# 3 Convenience
Many of us don’t realise the effort we need to put in when we buy a physical property until we really look to buy one. This includes working with one or more housing agents to view multiple properties, negotiating the price, arranging the downpayment, securing a loan on the new property and having to pay off the stamp duty and ABSD, if applicable.
If you decide to invest in REITs, all you have to do is look at information that’s already publicly available and decide which REIT(s) you want to invest in. From there, you can simply purchase the REIT(s) via a brokerage firm’s online platform.
# 4 Liquidity
When you want to sell your property investment, either because you’re uncertain about the property market or just need the cash, finding a buyer can easily take several months. If the market isn’t doing well, you may even need to accept an offer lower than what you expected.
If you own REITs, the price at which you can buy or sell your holdings is determined by the market. Once you sell your stocks, you will be able to receive the money within a few days.
# 5 Diversification
Diversification is another hallmark of REITs investing. Rather than buying just one or two physical properties of your own, investing in REITs diversifies your exposure with ownership of several buildings, and sometimes, across different countries.
REITs listed in Singapore are typically focused on specific property types – office, retail, industrial, hospitality or healthcare sectors. In addition, there are three REIT exchange traded funds (ETFs) listed in Singapore. They are the Phillip SGX APAC Dividend Leaders REIT ETF, NikkoAM-Straits Trading Asia Ex Japan REIT ETF and Lion-Phillip S-REIT ETF.
These REIT ETFs are invested into multiple REITs, with two of them (Phillip SGX APAC Dividend Leaders REIT ETF & NikkoAM-Straits Trading Asia Ex Japan REIT ETF) having investments in overseas REITs as well.
# 6 Professional Management
Managing your own property can be a hassle. You need to consider downpayments, mortgage repayments, level of debt, how interest rates will impact your cashflows, government policies, taxes, renting out and maintaining your property, as well as all the other worries of being a property owner.
When you invest in REITs, these headaches are taken care of by a professional property management team. They usually have extensive experience and networks in the industry, in Singapore and overseas markets, which allows them to make optimal decisions in terms of rental.
# 7 Control
If you own a property, you can decide if you want to sell it, rent it out or even spruce it up to get better rental returns. These are decisions you don’t have a big say in when you invest in REITs as the property managers and controlling shareholders decide how to best manage the properties under their purview.
# 8 Growing Your Portfolio
If you own individual properties, it may be difficult to keep putting down 20%, forking out ABSD taxes and complying with the stringent TDSR to buy more properties to grow and diversify your portfolio. By investing in REITs, you’re able to grow your portfolio whenever the REIT managers decide to purchase a new property.
REITs pay for property investments in three ways, 1) through internal funding, 2) by issuing new shares to strategic partners and 3) issuing new shares to existing shareholders. You only have to fork out more money when they choose to raise funds via option 3. Even then, if you prefer not to purchase more shares, you can simply pass up on your allocation.
# 9 Income Tax
Your returns when you invest in physical properties and REITs are treated very differently. Rental income on a physical property will be subjected to income tax, while distributions by REITs are tax-free.
# 10 Managing Your Returns
Lastly, one of the key differences that you need to consider is how your returns will be managed. For REITs investing, your returns are obtained mainly through the distribution per unit (DPU), which is how much dividends you get for every share that you own. Dividends are usually given every quarterly or semi-annually. There is little effort required on your part as an investor, beside choosing which REITs you wish to invest in.
For properties, your returns are in the form of monthly rental. You will need to negotiate with your tenant and to ensure its prompt payment. While you have full autonomy over any decision, it’s also a responsibility that you need to bear. If you are unable to find a tenant, you will not receive any returns.
Of course, both property and REITs also allow investors to sell off their investments for the realisation of capital gains.
Start Investing For Tomorrow, Today
While there isn’t a right or wrong way to invest into properties in Singapore, investing in REITs offer many advantages that we can benefit from. You don’t need to struggle to put together a large sum of money before you can invest in the Singapore property market. This is especially pertinent for those just starting out, and do not have a large sum of money or have money already tied up in other assets.
New to investing? You can visit the ForTomorrow.sg website to read more articles on how you can get started on your investing journey today.