Whenever the topic of investments come up in Singapore, the word “property” is never too far away. Those born in the 1960s and 1970s often swear by properties, and it is hard to fault them for thinking this way given the constant and meteoric rise of property prices in Singapore in the last four decades.
As we enter a new era where the government looks to be cooling the residential property market via several rounds of cooling measures since 2009, those still attracted to property investments should consider if they condominium are still practical or if investing in real estate investment trusts (REITs) and property developers on the stock exchange present viable opportunities.
Investing In Condominiums, And Other Private Properties
The simplest way to think about property investments is to purchase a condominium and then rent it out. This way, you fork out the downpayment (usually 20% of the value), including other miscellaneous payments such as stamp duty, lawyer’s fees and agent fees, and receive rental income to pay off the mortgage.
After 20 to 30 years, the property is fully paid and you also enjoy the “constant meteoric” rise in prices as mentioned earlier. After several years of enjoying very healthy appreciation in prices, you refinance your property to again reset it at the 20% mark.
This enabled you to “withdraw” up to 80% of the price appreciation as well as the portion of your mortgage that was meant to pay down the capital. By doing this, you can use the excess cash to reinvest into another property and do the same thing all over again.
Property investors in Singapore who were not prudent and overleverage suffered this strategy during the downturns when they were forced to top up their loans when their property values declined.
This strategy is no longer viable for the younger generation following the introduction of the property cooling measures by the government. Firstly, to buy subsequent properties, you would now have to pay a hefty Additional Buyer’s Stamp Duty (ABSD) that increases for each subsequent property purchase, up to three, after which it remains constant.
You also have to take into consideration the Total Debt Servicing Ratio (TDSR) where you can only use up to 60% of your annual income to service your loans. In addition, you have to take into consideration the Loan-to-Valuation (LTV) limits that you need to fork out for downpayments of investment properties.
Needless to say, it is now much more complicated and restrictive to invest in residential properties in Singapore. You can try to venture into industrial and commercial properties, although some of these restrictions such as the LTV ratio still apply. There are also limitations to the increases in property prices today’s owners can expect to see in the short or medium term.
Property investors in the past did not have the options investors have today – to invest in a wide variety of REITs and property related stocks globally.
Investing In REITs
REITs often own or finance properties for the purpose of renting them out to deliver a return to its unitholders. This is pretty similar to what residential property owners think about in the first place. REITs are traded on the stock exchange and investors can purchase them in the same way they invest in shares.
The benefit of investing in a REIT is that they often own a large pool of properties, many times in several developments and even in several different countries, which allows them to find the optimal mix of tenants and make the best use their properties.
To individual property owners, not renting out their property could have disastrous effects on their financial well-being. For REITs, they can afford to not rent out 100% of their properties, but still manage it well enough to rent out over 90% of it, and still be able to deliver stable returns to its unitholders.
In Singapore, there are close to 50 REITs, REITs Exchange Traded Funds (ETFs), Stapled Securities and property-related investment trusts you can invest in. The properties that these REITs have on their books are also very diverse and typically span Singapore, Australia, Asia Pacific and even Europe and the US.
Also Read: How REITs In Singapore Performed In 2016
This investment has also become very popular in Singapore in recent years, likely due to the country’s love for property investments in the first place. The most common way to invest into REITs is still to buy individual REIT units on the stock exchange.
In the past months, there have been a couple of new REIT ETFs that have listed on the stock exchange. They are the Nikko AM-Straits Trading Ex Japan REIT ETF which was listed on 29 March 2017 and the Phillip SGX APAC Dividend Leaders REIT ETF which was listed on 20 October 2016.
REIT ETFs are usually invested into a basket of REITs that is determined by an index. Taking the Nikko AM-Straits Trading Asia Ex Japan REIT ETF as an example, we see that it tracks the FTSE EPRA/NAREIT Asia ex Japan Net Total Return REIT Index.
This means that there is no one actively managing the buying and selling of the individual REITs within the fund, they just replicate what the index does. And this brings down the management cost of it.
Investing In Real Estate Companies
Real estate companies exist in several forms, including property developers, construction companies and real estate management companies and operators. Many of these companies are listed on the stock market and investors who are interested in property can focus on them.
It boils down to how the investor wants to get invested in properties. Real estate companies involved in the construction and upgrading of properties do not necessarily own or manage properties.
Companies such as Straits Trading Company owns properties in the form of properties and investment companies that take up stakes in properties, a real estate management company in the form of recently-listed ARA Asset Management which manages prominent REITs and property funds as well as hospitality operator Far East Hospitality Holdings which has over 80 hotels and serviced residences properties.
By owning a single condominium, owners will have a lot of problems ensuring the property is well managed, rented out on time and at the best possible rates.
Companies like Straits Trading Company owns properties in the form of REITs and businesses that manage and run properties. Individual investors can invest in these companies by buying their shares on the stock exchange. Moreover, being mainstays in the property market, they have relationships with key partners and players to leverage on to take advantage of opportunities to buy and sell when they present themselves.
While owning properties and REITs can offer returns in form of consistent dividends, investments in real estate companies may not be the same. If you are an investor that has that requirements, you have to find stable companies that have a good track.
Taking Straits Trading Company as our example again, they pay a dividend every year, and where possible, usually after divesting its assets for gains, pays out special dividends.
Recently, on 9 April 2017, OCBC initiated coverage on the company, valuing it $2.73, a 15.2% upside from its current share price of $2.37 on Friday (28 April 2017).
How To Decide What To Invest In
There’s no right or wrong way to invest. Singaporeans love investing in properties, but with prices so high and policies in place to limit speculation in the market, today’s generation may have to look to other avenues to get invested in properties, or even consider other forms of investments.
REITs and real estate companies listed on the stock exchange offer good opportunities to still get in on property investments. Investors have to do their own research and learnings to ensure they make astute investments, this is no different to making astute investments in properties.
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