REITs vs SG Investment Properties – 7 reasons why REITs are better

REITs vs IPs1

As Asians and Singaporeans, we traditionally favour investments that are more tangible and brick-and-mortar. This is evidenced from the enduring popularity of property as a form of investment compared to stocks, bonds or even Real Estate Investment Trusts (REITs). These investments are viewed as complicated and difficult to understand, and are shunned as a result.

Today, I shall make the case for why I feel REITs are superior compared to investment properties as a form of property investment.

Comparison.jpg

The REIT Supremacy

1) Yields

Private residential rental yields have been on a downtrend due to excess supply in the market and sky high property prices.

Rental Index.JPG

Source: URA

Most private residential yields typically yield 3-4% with few properties able to command a 5% yield. Contrast this to the REITs available in the market, where you can get a high quality REIT like Capitaland Mall Trust at 5+% yields. If you are more adventurous, lower quality REITs are easily available at 6-7% yields.

Given this disparity, private properties does not seem attractive, especially considering the risk and amount of leverage you are exposing yourself to.

2) Ease of Research

REITs, being publicly listed, have an obligation to provide a lot more information to the public about each of the properties they own, from tenancy mix to individual property yields and lease expiry. Consequently, a smart investor is able to easier determine if a REIT is undervalued or not.

Contrasting this to properties, a lot of information is opaque and have to come from multiple sources / agencies. Sources like REALIS by URA requires a fee to access. This makes it harder for investors to make a personal judgment of the property’s value.

3) Capital Outlay

REITs can be bought in small, bit-size positions. With a minimum lot size of 100 units, this means that you can initiate a REIT investment for less than $300 dollars with most REITs priced at less than $3 per unit.

Contrasting this to properties, with the average private property costing a minimum of SGD1 million, a single property investment will suck up a significant portion of an average Singaporean paycheck at the same time expose yourself to a significant amount of leverage.

4) Liquidity

REITs are listed on a exchange and can be sold easily any work day of the week, while properties have to go through a lengthy sales and marketing process that could take months before being sold.

5) Diversification

Investing in a REIT gives you exposure to all the properties under their care, while buying a property just gives you exposure to just that one property. Diversification allows you to not be beholden to a single tenant, thus making the income stream more sustainable and less at risk.

6) Property management

REITs come with the built in benefit of a property and REIT manager who combine to ensure the properties are properly maintained and tenanted. Buying your own property would involve you performing all the tenant facing functions and handle complaints on your own. Of course you could hire your own property manager, but it is just not cost effective on a single property.

7) Income tax treatment

In Singapore, if a REIT distributes at least 90% of its distributable income to unit holders, the REIT is given tax transparency, ie the REIT will not need to pay income taxes on the rental income. As distributions from REITs are also tax exempt for personal income tax purposes, the rental income from REITs are essentially tax free.

As for property rental income, it is subject to personal income tax with no favourable tax treatment.

Then why buy properties?

With there being insufficient yield support for private properties, your purchase is very much a bet that the property value will surge in the future. If you are an astute property investor coupled with the power of leverage, you can potentially make a lot of money if your bet is right.

However, leverage is very much a double edged sword. If your bet turns out wrong, you are potentially on the hook for a loan that is in excess of the price of the underlying asset. This is something we should be all too familiar with in the 2008 subprime mortgage crisis.

For me, as someone who knows little about the property market, I just don’t really want to play around with that.

Conclusion

Given all the advantages REITs have over private properties, REITs very much has the edge as the better property investment for the average retail investor. Buying properties for investment is mainly a rich man’s game and I don’t really want to over-extend myself in my pursuit for long term gains, not when there is a comparatively less risky investment on the market.

Happy Hunting,
KK

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4 thoughts on “REITs vs SG Investment Properties – 7 reasons why REITs are better

  1. Hi

    Thanks for the article. I have a question about point 1. the Rental yield of 3 to 4% doesn’t take into account leverage? All REIT employ leverage and the dividend yield is after accounting for leverage

    If we take the yield of 4% and assume the property owner uses 40% of asset value as debt financing, then we get 4%/0.6 = 6.67%. This is a closer comparison to a REIT’s dividend yield.

    But all the other points do make the case why REITs may be better vs properties.

    • KK says:

      Hi NerdLibrarian,

      Hmmm good point. I would qualify that the 6.67% doesn’t take into account expenses and taxes, so the reality would be lower. But good point.

      Regards,
      KK

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