With Real Estate Investment Trusts (REITs) in Singapore now looking good value for money after an initial Covid-19 drop in March 2020, investors have started putting money into them again. And they would be encouraged by measures in place to help locally-listed REITs ride the storm. In contrast, actual property prices in Singapore has only dipped slightly, and the ABSD looks like its here to stay.
But it’s not the first time that sentiments have tipped towards REITs. REITs also trended for awhile in 2014 and as recently as 2019. In fact, REITs seems to be a “go to” for investors whenever the government pokes the real estate market. But are they really better than investing in actual real estate?
Firstly, REITs and real estate aren’t considered an either/or choice by serious investors.
In our experience, investors have both REITs and real estate investments. You’ll find many investors, for example, who own a condo to rent out, while also owning REITs as part of their investment portfolio.
That’s because REITs allow them to diversify into other types of properties (e.g. industrial), which are a whole different ball game and best left to the experts (i.e. those managing the REITs).
No matter how deep their pockets, typically retail investors are more comfortable with directly putting money in residential properties than, say, factory space.
But the retail investor knows that industrial yields can be good, so makes perfect sense for he/she to buy industrial REITs and let a professional manager run the show, while directly handling residential properties he/she owns.
To use an analogy, you should think of REITs and properties as being different tools in an investor’s toolbox. A hammer may be appropriate than a drill for some situations, but it’s not reasonable to say that a hammer is objectively better than a drill, or vice versa. In the same way, it doesn’t make sense to declare whether REITs or actual properties are “objectively” better.
A better question to ask is WHEN you should invest in REITs, versus properties
At the time of writing, more investors are turning to REITs. This is not surprising, as many are adopting a “wait and see” approach to gauge the full effect of the Covid-19 recession on property prices.
In fact, according to a poll we did on 450 likely condo buyers in April 2020, 65% of respondents are waiting for property prices to fall further before buying.
Falling rental demand (and rent) is also a worry, whenever there’s an economic contraction.
The other factor is that many REITs are looking good value right now. Industrial, logistics and warehousing properties, as well as healthcare facilities and data centres, are some of the real estate assets that are expected to escape the worst of the Covid-19 recession, and some of these REITs have even returned to their pre-Covid-19 prices at time of writing.
Investors who, for instance, want to ride the wave of data centres will have little choice but to seek exposure to the market through REITs. Because again, residential investors may lack the specialised knowledge to directly buy and manage other types of properties.
It’s NOT that REITs are safer now (or even), as they are equity assets with much higher volatility and risk then a condo unit, which enjoy a certain degree of price stability because of measures put in place by the government like Seller Stamp Duty and the Additional Buyer’s Stamp Duty (ABSD).
It’s just that, at this point in time, REITs look better value, are seen as potentially yielding greater returns, and involve a far, far lower capital outlay.
That being said, there are also many investors who still prefer physical properties over REITs, with good reason.
There are 5 key advantages that real properties have over REITs
- Potentially better returns
- Direct management
- Better leveraging
- Reassurance from direct ownership
- You can use real property as something other than a financial asset
Potentially better returns
Some investors believe they can still find good properties, even during a downturn (sometimes, especially during a downturn.)
These investors continue to trawl the residential markets, for properties with unrecognised value, or hidden fire sale opportunities. If they’re able to find any, their returns will probably be higher than what they get from investing in any REIT.
One assertion among these investors is that it’s easier to find an undervalued property than to find an undervalued REIT. Because REITs are monitored by so many investors, it’s highly improbable that a REIT will ever sell for cheaper than its actual value.
In fact, if you’re reading this, you’d probably have missed the boat for 90% of the rights trading out there on the SGX.
With individual houses however, value appears all the time in unexpected places. This is simply because there is no perfect availability of information for every home out there all at once, unlike REITs or stocks.
For example, buyers may miss the fact that a unit has a better view than others in the same block, or there’s a buyer wanting to sell but hasn’t listed. REIT investors, on the other hand, can just assemble a trading terminal and fit everything they need to know on four LCD monitors.
Of course, the real estate investor still has to put in a lot of effort and footwork. He/she also needs to be experienced enough to identify properties or great value. A data-centric property portal like 99.co can help you here, as you can compare prices easily across different units and even districts in Singapore.
There is a general divide between investors here. Some prefer the fact that REITs are managed by a full time professional, as they have no expertise in that REIT’s particular market. This may be the entire reason they invest in a REIT instead of directly in the property.
On the other hand, there are property investors who hate paying REIT managers (and you do pay them, their fees come out of your returns). Some investors see an inherent problem here, as REIT managers are effectively paid based on the number of properties managed.
The higher the value of the REIT’s assets, the more the manager gets paid.
This can be problematic, such as if the REIT manager starts buying up properties for the sole purpose of charging higher fees instead of generating better returns for the investors. Suspicious investors point out that, if a REIT crashes and burns, the people running it won’t have to pay back a single cent of their fees and bonuses. Eagle Hospitality Trust is a recent cautionary tale for REIT investors.
Of course, not all REITs are run this way, and if they were no one would be investing in them right now. But it comes down to individual investor mindsets: if you’re okay with how REITs charge you, then this is a non-issue. But if you don’t trust managers/other landlords, then physical property will set your mind at ease.
When you buy actual property, you’re able to borrow a lot of money at a rock-bottom interest rate. For the average Singaporean, buying a property is the only time we’re able to borrow more than a million dollars to invest.
Try asking your bank for a $1 million loan at 1.6% interest to invest in REITs or other stocks—they’ll probably kick you out before even offering the free mineral water.
[Recommended article: Loan-to-value (LTV) limit: a Quick Guide for Property Buyers]
Reassurance from direct ownership
Singapore has very low corruption rates, but REITs still require a higher level of trust than owning the actual property.
Embezzlement, fake assets, kickbacks from developers, creative accounting… all the white-collar crimes that can suddenly bring down a company can also happen to a REIT. And when that happens, investors are usually lucky to get back even a fraction of their money.
Again, the recent case of Eagle Hospitality Trust comes to mind.
When you buy the actual property, you’re in full control. You have the actual title deed, you know all about the relevant debts, and you have a physical structure that you can claim to own.
Some investors prefer property investment for precisely this reason, and REITs doesn’t appeal to them one bit.
You can use real property as something other than a financial asset
This is not really an investment factor, but we include it just because many property investors raise this point.
When you own a house, you can use it for purposes other than money. You can choose to forego a few years of rent, to let your newly married child raise a family in it. You can choose to use it a vacation home for a long sabbatical (if it’s overseas), or you can choose to move into it and rent out your current home instead.
On the other hand, until you choose to sell it, REITs are just numbers on screens. Catch the drift?
What’s a smarter pick for you, REITs or property? Let us know in the comments section below.
If you found this article helpful, 99.co recommends 5 property myths Singaporeans wholeheartedly believe in and Calculate rental yield in Singapore: a quick and simple guide
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