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The allure of investing in a property in Singapore is the same for most. The plan is to spot an undervalued property in a good location. After paying a 25% downpayment for the property, we (hope to) get a tenant to pay off our monthly property loan.
After two decades or so, we end up owning a fully paid investment property – that has hopefully also enjoyed price appreciation. Since our downpayment was only a fraction of the property price, any increase in the property value can be seen as our profit for our investment.
For example, if we purchased a $1 million property today, and its value increases by 10% in 20 years, it will be worth $1.1 million. Since we only need to pay $250,000 in downpayment when we buy the property, our return on investment, disregarding all the monthly rental income and costs, is 40% (i.e. $100,000/$250,000).
Taking rental income into account, our returns can snowball.
Young Working Adult May Be Priced Out Of The Property Investment Market
While compelling, property investing can be a challenging game for young working adults to get into. Still in the early innings of our career, most of us will have financial commitments to shoulder. This includes getting married, buying a family home, having children, and caring for our ageing parents.
Furthermore, an investment property will typically be our second residential property. This means two things: 1) after buying our family home, we need an extra several hundred thousand dollars for the downpayment; and 2) having to pay an Additional Buyer’s Stamp Duty (ABSD) – which currently stands at 20% for our second property and goes up to 30% on our third and subsequent property.
Despite the obvious barriers to property investing, we don’t have to give up on investment properties entirely. We can still easily invest in properties via REITs – which can also enable us to employ leverage to boost our portfolio.
Read Also: Generational Investing: Does It Make Sense To Invest For Your Children & Grandchildren?
REIT Investing In Singapore: The Largest REIT Market In Asia (ex Japan)
Outside of Japan, the Singapore Exchange (SGX) is home to the largest REIT market in Asia – with 42 REITs and property trusts that have a combined market capitalisation of $100 billion. Currently, Singapore REITs (S-REITs) also pay an average dividend yield of 8.1%.
With REITs, we can start building our exposure to real estate even with a small investment capital. Not only that, investing in REITs enables us to diversify our real estate portfolio – across multiple properties, various property types and in different geographical markets.
Unlike investing in real estate on our own, where we will likely only be able to invest in one or two properties, individual REITs tend to own multiple properties within their portfolio. For example, the first and largest Singapore-listed REIT, CapitaLand Integrated Commercial Trust (CICT) owns 26 office and/or retail properties worth $24.2 billion.
When Singapore investors think about buying properties, we tend to think about a residential condominium or office or industrial space. REITs can provide greater diversification across property segments, such as industrial, retail, office, hospitality, health care, and data centres. On SGX, we can gain exposure to seven property sub-segments.
| No. | Property Sub-Segments | % (By Trust Count) |
| 1 | Diversified | 23% |
| 2 | Industrial | 20% |
| 3 | Retail | 20% |
| 4 | Office | 15% |
| 5 | Hospitality | 13% |
| 6 | Health Care | 5% |
| 7 | Specialised (i.e. data centres) | 5% |
Source: SGX
While we are most familiar with Singapore properties, there is no reason to concentrate our property investments only in Singapore. The good thing is that 90% of Singapore REITs have exposure to overseas assets, and many also own properties in multiple countries – with only three Singapore pure-play REITs listed here.
Source: SGX
Using Margin Financing To Boost Our Real Estate Exposure Via REITs
Similar to taking a loan to buy an investment property, we can leverage on margin financing to boost our REIT portfolio.
Let’s say we want to invest in a REIT that is currently trading at $1.00 per unit. If we have $10,000 in cash, we would only be able to buy 10,000 units. If the price of the REIT increased to $1.20, our REIT portfolio would be worth $12,000 – giving us a 20% return.
We can increase our investment value by up to 3.5x with margin financing from a stock brokerage firm such as Maybank Securities. This means, with the same $10,000 capital, we can buy up to 35,000 units in the REIT at $1.00. With a similar price appreciation to $1.20, our REIT portfolio would be worth $42,000 – giving us a 70% return instead.
| Capital outlay of $10,000 | Without Margin Financing | With Margin Financing |
| Portfolio exposure | $10,000 | $35,000 |
| Capital gains if share price increase 20% | $2,000 | $7,000 |
| Effective return | 20% | 70% |
Do note that this illustration does not include stock brokerage commission, margin financing fees, or any other types of fees
Besides capital appreciation, we can also benefit from the difference in our margin financing cost versus our REIT distributions. As highlighted above, S-REITs currently offer an average yield of 8.1%. If we assume a margin financing rate of 4.5%, we can potentially enjoy 3.6% returns on our borrowed funds.
Using the same example above, a $35,000 REIT portfolio will be able to generate $2,835 in annual distributions at an 8.1% yield. At the same time, we will incur a cost of $1,125 (4.5% of the borrowed $25,000). This means our REIT portfolio will give us an additional $1,710 per annum.
Without using margin financing, the same $10,000 REIT portfolio will only give us $810 in distributions a year.
| Capital outlay of $10,000 | Without Margin Financing | With Margin Financing |
| Portfolio exposure | $10,000 | $35,000 |
| Distribution p.a., if distribution yield is 8.1% | $810 | $2,835 |
| Margin Financing cost (at 4.5% p.a.) | $0 | $1,125 |
| Net yield | $810 | $1,710 |
| Effective return | 8.1% | 17.1% |
Do note that this illustration does not include stock brokerage commission, or any other types of fees. Margin financing cost of 4.5% is only for illustration purposes, and is not meant to reflect prevailing interest rates.
These examples are simply illustrations of how margin financing can work in our favour. The markets can also move against us, and a magnified exposure to a REIT portfolio can also lead to bigger losses. While we have some buffer with the annual distributions, we can also suffer margin calls. That is why we have to be extremely prudent when employing margin in any investment decisions we take.
Quality Of Our REIT Investments Matter
The higher the quality of our REIT investment, the 1) bigger the margin financing we can take and 2) the lower the interest we will end up paying. Maybank Securities lists this as Interest Grade (signifying how much interest we need to pay when using margin financing to invest in a certain REIT or stock) and Valuation Grade (signifying how much margin we can use, up to 3.5x).
For example, CapitaLand Integrated Commercial Trust (CICT) is both a Grade 1 (under Interest Grading) and Grade A (under Valuation Grading). Rather than going with Maybank Securities’ Flat interest rate, we can enjoy the most competitive interest rate and take up the full 3.5x margin to build our exposure in the REIT.
Source: Maybank Securities
As we can see above, listed as a Grade 1 under the Interest Grade column allows investors to access preferential interest rates under Maybank Securities’ Grade Based Interest Rate Scheme.
On the Maybank Securities website, we can also retrieve information for the grading of various other Singapore REITs. Securities that have a lower valuation grading will qualify for lower financing and typically higher interest rates.
| Valuation Grade | Valuation for financing | Your Portfolio Exposure with $10,000 | How Much You Are Borrowing |
| A | 100% | $35,000 | $25,000 |
| B | 85% | $29,750 | $19,750 |
| C | 70% | $24,500 | $14,500 |
In general, only selected REITs (and other securities) listed on the SGX fall under Maybank Securities’ Grade A securities. Constituent stocks of Malaysia’s Kuala Lumpur Composite Index (KLCI), Hong Kong’s Hang Seng Index (HSI) and the S&P 500 and NASDAQ 100 in the US are classified as Grade A.
Investment grade corporate bonds and bonds issued by Grade A stocks are also considered Grade A securities. You can find out more on Maybank Securities’ grading criteria on its website.
You May Get Margin Called On Your REIT Portfolio
When prices move in our favour, margin financing can seem a lucrative way to magnify our investment exposure. However, markets can also move against us, and we need to understand the implications of such a scenario.
Let’s say that instead of prices going up, they start falling. In this case, we will need to provide additional cash, or potentially even see our positions liquidated.
| When first investing | After 5% price drop | After 20% price drop | |
| Value of cash pledged to margin financing position | $10,000 | – | – |
| Value of REIT portfolio | $35,000 ($10,000 x 3.5x) | $33,250 | $28,000 |
| Amount of financing | $25,000 | $25,000 | $25,000 |
| Margin ratio | 140% | 133% | 112% |
Do note that this illustration does not include stock brokerage commission, margin financing fees, or any other types fees
Once the value of our portfolio drops under 140%, we will need to inject new cash to bring the margin ratio back up. In the scenario that market prices drop by 5%, our margin ratio will be 133%, and we will need to inject $1,750 of fresh capital to bring our margin ratio back to 140%. If we do not do so within 5 market days, our positions may be liquidated to bring the margin ratio back to 140%.
However, in the scenario that our margin ratio goes under 130%, the broker can liquidate our positions to bring the margin ratio up without any notifications.
As we can see, even a 5% drop in market prices can put us in a fix if we maximise our margin level. This underscores the importance of taking up a margin level that we are comfortable with – instead of just trying to stretch our exposure beyond our risk appetite.
Boost Your REIT Portfolio With Margin Financing
By leveraging on margin financing, we can magnify our exposure to the REIT market and other securities – boosting our capital gains and/or enjoying the difference between our margin financing rate and the distribution yield that our REIT portfolio pays.
With this in mind, the margin financing rate can be an important factor in determining how well our portfolio performs. That’s why Maybank Securities offers a competitive Grade Based Interest Rate Scheme – where REITs listed as Grade under its Interest Grading enjoy the lowest interest rates.
Maybank Securities also provides up to 3.5x margin financing for securities listed as Grade A under its Valuation Grading. Obviously, the last thing we and our brokerage would want, is for margin calls to be triggered. This is why we need to understand the risks involved – and not take more risk that what we are comfortable with.
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