Today’s topic cover 2 forms of property ownership – REITs and Physical Property.
Traditionally, we are used to understand property ownership as owning a piece of land, or a unit. There is a clear boundary which defines the area that you own and THAT IS your property.
Less familiar would be REITs. This term is likely to be familiar to people who buy into equities but some may not fully understand REITS is also a form of property ownership.
Let’s define REITs here. Taken from Investopedia.com:
A real estate investment trust (REIT) is a company owning and typically operating real estate which generates income. Most REITs specialize in a specific real estate sector, focusing their time, energy, and funding on that particular segment of the entire real estate horizon. However, diversified and specialty REITs often hold different types of properties in their portfolios. Properties included in a REIT portfolio may include apartment complexes, data centers, health care facilities, hotels, infrastructure—in the form of fiber cables, cell towers, and energy pipelines—office buildings, retail centers, self-storage, timberland, and warehouses. One benefit of REITs for everyday investors is that they provide the opportunity to own a portion of real estate which generates dividend-based income.
From the above quote, we can see that essentially REITs is a trust which invests into a group of properties (typically in segments like hospitality, industrial, data centre, etc as designated by the company managing them.
By investing into REITs, you are basically buying into a part of real estate along with other investors to receive dividends.
To summarise,
Owning a tangible piece of property with its defined set of boundaries – Physical Property
Owning a part of real estate (can be a combination of few or single physical properties) along with others – REITS
To simplify further, REITS is like owning property on paper in comparison to owning a tangible, physical property.
With these basic differences cleared out of the way – let’s explore why and which you can buy into, or both.
REITs
As it is a kind of equity in which you can buy and sell on the stock market – REITs provides high liquidity for you. At any moment, you feel like cutting loss or deemed enough profits, it is easy for you to sell away your holdings to receive back in cash.
However, it is also good to note that REITs – being a kind of equity, can be highly volatile depending on market forces and industry trends. This has been clearly seen during the 2008 Global Financial Crisis and the corrections in 2015 and 2018. In 2008, REITs prices dropped by 70% in which prices now still have not recovered to pre-2008 prices. The economy corrections in 2018 and 2018 set prices back by 19% and 12% respectively – signifying the volatility as expected of a stock.
It also does not traditionally appreciate that much as compared to other stocks due to its nature as a dividend stock with returns through rental only. That said, initial capital can be very low so entry into the market is really easy. We can clearly see the benefits lie in the ease of entry and exit while focused on dividends – usually in the range of 4-6% in the context of Singapore.
Physical Properties
Owning a tangible, physical piece of real estate provides a very different proposition to property buyers. If you are a home-seeker, you are likely to still be going ahead to buy one as you need a place to stay.
In the case of investors, owning a property possesses risks like liquidity risks – Buying and selling a property takes time. If you are in urgent need of hot cash and like to quickly sell your property, you may find somstabilitye difficulties there depending on the quality of your property. This is because there are obstacles such as regulations, paperwork, marketing and etc before you can dispose your property.
While liquidity risks are relatively higher, it is also relatively lower in volatility. Properties (physical) are seen as a good way to hedge your money in times of economic uncertainties. As your stocks and unit trusts fluctuate wildly in such times, property prices are stable and good, quality properties can even appreciate in these times. In fact, at this point of writing, this situation is already happening as buying sentiments go up due to Singapore’s “safe-haven” status.
With that said, we can see that capital appreciation is potentially very high while being less volatile. Rental yield is then highly dependent on the price you paid for. It is mathematical that if you own a property which appreciates consistently – later down the road you will see better rental yield. However to start off, rental yield in Singapore is at an average of 3%, which is slightly lower than the average REITs returns.
Lastly, it is obvious to see that a big drawback of owning a physical property, especially in Singapore is the high amount of capital / downpayment required.
Breaking it down..
Summary
Both assets come with their own advantages and flaws.
REITs provide you the liquidity, low capital but comes with high volatility and low capital appreciation. Physical properties offer you low volatility and high potential for capital appreciation and rental yield, but it can be really expensive or hard to dispose when there is a need to exit quickly.
There is really no better or worse, if you look at it – these are two very different asset classes grouped under property ownership. It will make more sense, if you decide to invest into which depending on the economic situation and your own situation. You can also easily invest into both, thereby diversifying your portfolio and lowering risks.
As with any and all investments, investments come with risks which you will need to understand. There is no such thing as a sure-win investment, but you can get as close as possible by lowering your own risk as much as you can.
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