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 5 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%. Assuming your condo’s sale price is $1 million, your initial capital outlay will be $250,000.
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 (7 January 2020), CMT is priced at $2.45 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 $245. 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
As a REIT investor, you get to collect passive income without doing much at all. REITs are required to distribute at least 90% of its taxable income each year to unit holders in the form of distribution per unit (DPU). For instance, the DPU for CMT was 3.06 cents per share for the distribution period between 1 July to 30 September 2019. If you own 10,000 shares of CMT, you would have received dividends of $360 for that quarter – with no effort on your part!
When you own a rental property, the rental income you earn is not exactly passive. You need time and effort to manage and maintain your property for your tenants, and any costs associated with maintenance or repairs also eat into your returns. Compared to REITs, much more work is needed to earn that rental income.
From a yield perspective, REITs are a more attractive option as well. Here’s a comparison between CMT and Trevista Condominium, a property located in the Toa Payoh / Balestier estate. All figures in the table below are as of 11 May 2019.
The figures above speak to a broader trend as well. On average, the dividend yield of Singapore REITs is around 6.5%. The typical rental yield for a residential property in Singapore hovers between 2% to 3%.
3: Risks Involved
As with all investments, there are certain risks involved when investing in real estate. Overall however, REITs mitigate many of the risks involved through diversification, lower leverage, and greater liquidity.
Here’s how they stack up in terms of risks.
Weighing the pros and cons, it seems that REITs are generally less risky compared to rental properties.
In Singapore, dividends paid out by REITs are tax-free. So if you receive $10,000 as dividends from your REITs portfolio, you get to keep every cent.
But rental income from your property is subject to income tax. That’s on top of the property tax you have to pay, which is calculated based on the Annual Value of your property. In other words, you would be forking over a part of your hard-earned rental income to the Inland Revenue Authority of Singapore each year.
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.
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 five 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.