Investing in physical Property vs investing in REITS: Here’s when you should pick one over the other
Real Estate Investment Trusts or REITS, as they are called have been in existence since the 1960s. They have been listed in Singapore since 2002 and according to a report by Ernst and Young (EY), Singapore is the world’s sixth largest REIT market.
What are REITs and why are they useful?
Real Estate Investment Trusts, or REITs, are a very useful means of owning real estate or property for investors without actually going through the formalities involved in transfer of ownership from property owner to the buyer. REITs (pronounced ‘reets’) are just companies that own real estate or produce the funds for real estate that generate income for the companies.
As an example, Ascendas REIT and CapitaLand Mall Trust are two of the biggest REITs in Singapore. Within Asia, Singapore’s REIT market is one of the largest alongside those in Hong Kong, Japan and Australia. Still, it remains true that investing in a physical property entails doing away with a large chunk of money. That’s not always a profitable consideration for many would-be investors.
More of these investors would like to reduce the risk of placing their investments in just one property or a handful of properties by, instead, spreading the risk and investing in a number of properties. REITs fit the bill perfectly for such investors.
Advantages of investing in REITs over physical property
Compared to investing in a physical property or multiple properties that would often tie down a large chunk of an investor’s investible assets, investing in REITs are less asset-intensive. You don’t have to invest a large sum of money at once to own some percentage of a REIT through the purchase of shares
REITs shares are also more liquid, which means that they can be easily sold off for cash when you need them. With REIT investments, your risks would usually fall because you would spread the risk into multiple asset holdings instead of concentrating them into one property or only a handful of such properties.
Additionally, you would not actually need to go through the hassle of purchasing any property or manage them while you own them if you own shares in REITs. There are no hassles associated with rental collection, dealing with unruly tenants or recovering any damages caused by tenants.
Advantages of physical property and why investment in it makes sense
Without any doubt, any person would love to invest in at least one physical property if possible. In the context of Singapore, with home ownership rates as high as 90.9% in 2016, almost every Singaporean household has a place to call their home. Yet, most of them live in abodes on 99 year leases and that makes it imperative for most Singaporeans, as with any investor elsewhere, to invest in a physical property on a freehold basis wherever possible.
Such options could be utilized, if not within Singapore, possibly by venturing abroad in countries with sound regulatory regimes, good investor protection and respectable law and order. And that would possibly be in a country where property is cheaper than Singapore.
Which one is the better pick – REIT or physical property?
As with many other choices in life, it all boils down to personal preferences and circumstances. The amount of investible funds, the extent to which you are willing to take risks or avoid risks, the number of freehold properties that you own or the number of properties that you own on a 99 year lease, your current outlook and the one for your family members will all shape your decisions.
If you do not own a freehold property and you are eager to own one, then perhaps that would be a good choice bearing in mind your future requirements. Whether the freehold property is located within Singapore or in some regional country or perhaps beyond is not as important as securing a permanent place to reside in for you and your loved ones.
Given the lack of a social safety net in the form of broad based social welfare in Singapore, and with the ever rising cost of living, securing a permanent address – and not an address that your family can call yours for merely 99 years – will give you much needed peace of mind and your family members some much needed buffer against unforeseen circumstances.
On the other hand, if you own a freehold property or if you would like not to tie up a large chunk of your investible assets yet, looking at REITs maybe a worthwhile alternative. Given the size and maturity of Singapore’s REIT market within the Asia Pacific region, good research and sound advice from professionals can help you boost your net worth. On top of that, you can cash out almost any time without any worries if you are in need of liquidity in the future.