Real estate is always a hot topic in Singapore. In fact, it’s been said that owning a private property is the number one Singapore dream. Investing in physical properties – condominiums, shophouses or even commercial buildings – can offer passive income in the form of monthly rental. Over the long term, there may be capital gains if your property appreciates in value.
But with high property prices, not everyone can invest in Singapore real estate. Real estate investment trusts (REITs) offer a lower cost solution of investing in quality properties. Today, retail investors can invest in the best of Singapore’s real estate via REITs, all for a modest investment amount.
Whether you invest in physical properties or REITs, there are both advantages and disadvantages to think about. Consider these six factors before you make a decision.
1: Upfront capital
To purchase a rental property, you need to have enough money upfront to produce the down payment. To buy a condo, you’re looking at a down payment of 20%, of which the first 5% must be paid in cash – if you have no existing home loan. The remainder can be paid in a combination of cash or CPF Ordinary Account (OA) monies.
If you have at least one existing home loan, i.e. the condo is meant as a second property, your minimum cash down payment is a whopping 25%. And even after you’ve secured your home loan, you need to ensure that the interest rate you pay accommodates your expected monthly rental income.
REITs however provide a lower cost of entry for property ownership. Let’s take CapitaLand Mall Trust (CMT) for instance. At this time of writing, CMT is priced at $2.57 a share. This means that your cost of owning CMT, and by extension a piece of the 15 shopping malls within the CMT portfolio, can be as low as just $257. This assumes you purchase the minimum lot size of 100 shares, and excludes any brokerage fees for the transaction. Compared to rental properties, REITs provide a much more affordable way to invest in Singapore real estate.
2: Income earned
Rental properties can provide consistent and reliable monthly cash flow in the form of rental income. As the owner of your property, you get to decide how much rent to charge and perhaps when you want to raise the rent. But any costs associated with property maintenance or repairs may also eat into your returns.
With REITs, unit holders receive quarterly or semi-annual income in the form of distribution per unit (DPU). REITs are required to distribute at least 90% of taxable income each year to unit holders in the form of dividends. DPUs reflect how much an investor gets for every share they have in the REIT.
For the distribution period between 1 July to 30 September 2019, the DPU for CMT was 3.06 cents per share. If you own 1,000 shares of CMT, you will receive dividends of $36 for the quarter. From a yield perspective, REITs are a more attractive option as well. The average current dividend yield of Singapore REITs is around 6.2%. The typical rental yield for a residential property in Singapore hovers between 2% to 3%.
As a REIT investor, you get to collect passive income without doing much at all. Better managed REITs are also able to consistently grow their earnings and DPU over time to provide greater value for unit holders.
That said, both rental properties and REITs stand to earn capital gains. If the price of your property or REIT appreciates, you can sell them for a higher price.
Buying a condo (or two) is not unheard of. But directly owning a portfolio of offices, shopping malls or hotels requires some really deep pockets. For investors who want to invest in more than just residential property, REITs provide an avenue. Purchasing a retail REIT, commercial REIT and hospitality REIT allows you to affordably invest in offices, malls and hotels at once.
Because a REIT usually owns a portfolio of multiple properties, investing in a single REIT offers greater diversification benefits than simply investing in one property. Trouble with one tenant could significantly affect the rental income of a condo. A REIT however would have hundreds or thousands of other tenants to cushion the impact.
A rental property is an illiquid investment. Finding the right buyer for your property takes time. Your property also ties up a large proportion of your wealth for many years. In comparison, REITs offer greater liquidity since they can be bought and sold freely on the SGX.
5: Effort and time spent
The success of a rental property lies solely on the shoulders of the investor. Renting out a property requires hands-on management. You need to find tenants, draft lease agreements, ensure tenants abide by the lease agreements, maintain the property, and more.
REIT investors are free from this responsibility. REITs are professionally managed – the REIT manager and property manager work together to implement asset enhancement initiatives and optimise rental yields. This is ideal for investors who may not want the hassle of operating and managing a property on their own.
6: Control and ownership
As a REIT investor, you don’t have a say in the day-to-day running of the REIT. Unit holders may have certain rights such as calling for a general meeting to vote on a resolution to remove the REIT manager. But decisions on how to manage the REIT properties are largely still in the hands of the REIT management team.
With a rental property, you call the shots on your investment. If you want to sell or renovate, you’re free to do so. While being in charge sounds exciting, there are many responsibilities and commitments involved as well.
Evaluating Your Options
Investing in real estate can provide a valuable source of passive income and bring you closer to your financial goals. To determine which real estate investment maximises your return potential for the amount of time, effort and money you can commit, consider the six factors we’ve outlined above. If you prefer taking a backseat, a REIT provides the benefits of property ownership without the hassle. And even if you intend to purchase a rental property, a REIT gives you exposure to other property types, from commercial to hospitality.
No matter which option you pick, REITs have a place in your portfolio.