REITs vs Property: Which is a better way to invest?

By Felicia Tan and Timothy Tay

/ EdgeProp |

August 3, 2020 3:52 PM SGT

SINGAPORE (EDGEPROP) - Real estate has always been regarded as a popular investment option. It is something most investors are familiar with; after all, we all need houses, have shopped at shopping centres, or have stayed in a hotel before, right?

Real estate is also a mostly stable investment option that may bring you high returns generated from your investments. Another plus: investing in property is something we are mostly familiar with, and having physical property is an asset we can make use of, or leverage on, if things go south.

However, investing in actual real estate or REITs isn’t really an “either/or” decision. If you have enough capital, why not go for both?

To keep things simple here, when we talk about investing in physical real estate, we are referring to private residential property.

Let’s take a closer look.

Physical real estate

In land-scarce Singapore, where property prices are almost always on the rise, land, especially freehold property, is regarded as a valuable asset to have. In fact, owning a piece of property is practically a must-have in the Singaporean Dream; the bigger the house, the better.

Property investors buy into real estate to enjoy the rental returns over time, or to capitalise on the increase in prices in the secondary market. Alternatively, opportunistic investors may buy units in an older property that has a high en bloc potential, in order to capitalise on the next en bloc wave.

If you’re looking at buying a freehold plot, you may consider redeveloping the property into a house with a larger gross floor area (or GFA). This way, should you choose to relocate to another area in future, it could fetch a higher resale price.

i. Plus-points

One of the advantages of owning property directly is that you are in charge. This means you get to make all the decisions that may affect the returns on your investment, such as the rental price, the number of properties you want to own, and whether they are fully furnished or not.

For condominiums, keep in mind that your Management Corporation Strata Title (or MCST) -- and the en bloc committee in the case of older properties – may play an important role in determining how much your unit is worth.

ii. Disadvantages

On the flipside, as you know, private property in Singapore isn’t cheap. Even if you have the ability to purchase a second property for investment, you will need to have enough cash to pay for various related expenses such as stamp duties, utilities, renovations and furniture.

Should you require funds urgently, you may not be able to liquidate your physical property assets as quickly as stock or REIT investments.

Home buyers might also find it more difficult to get a private housing loan in light of the revised Loan-To-Value (LTV) limits that were implemented as part of the property cooling measures in July 2018. That saw LTV limits tightened by 5 percentage points for all housing loans guaranteed by financial institutions.

For example, the LTV limit for a borrower with no outstanding housing loans for the purchase of a second residential property is 75%, down from 80% previously.

You will also be subject to property ownership and maintenance taxes, as well as Additional Buyer’s Stamp Duty (ABSD).

The latest round of property cooling measures in July 2018 saw the government increase the ABSD rates to 12% from 7% for citizens buying a second residential property. Foreigners buying any residential property here now pay an ABSD of 20%, an increase from 15% before the 2018 changes.

See also: Higher ABSD deters homebuyers in 2019, IMF recommends adjustment to property cooling measures, eliminating ABSD eventually, and Singapore no place for speculators as home stability goals met

Real Estate Investment Trusts or REITs

If you’ve read our guide to REITs, you will know that buying into REITs is one way for you to invest in property without needing to put in as much capital and hard work.

There are various types of REITs, holding income-producing assets ranging from office buildings to shopping malls, industrial warehouses and hotels.

Singapore’s REIT sector has performed well since the first REIT – CapitaLand Mall Trust (CMT) – went public in 2002. Singapore has become a REIT listing hub of sorts; it helps that REITs with assets in Singapore have no tax levied on them so long as they pay out 90% of their distributable income. REIT distributions also carry no withholding tax for most REIT investors.

i. Plus-points

Unlike investing in physical real estate, it does not take much to put your money in REITs. In fact, investing in REITs is just like buying shares in the stock market. You will only need to have a Central Depository Account (or CDP) and brokerage account to begin investing.

ii. REITs are not expensive

Investing in a REIT like Capitaland Mall Trust, for example, costs $2.01 x 100 units as at July 21. You will need to invest in a minimum of 100 units per one standard lot on the Singapore Exchange (SGX). Before the market plunge in March 2020 due to the coronavirus pandemic, the REIT was hovering around $2.30 to $2.60 per unit in 2019.

REITs derive rentals and other income that the underlying properties command. REITs are required by law to pay out at least 90% of their distributable income as dividends, and the dividends you receive are tax-deductible.

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