REITs (Real Estate Investment Trusts) in Singapore are an alternative to investing in property in Singapore. But for the longest time, investing in property itself has traditionally been thought of as the go-to way to grow one’s money, should you want to dip your toes into property-related investments.
This is due to the massive capital gains enjoyed by those who bought property in Singapore in previous decades. With the Singapore property investment market slated to return to pre-COVID-19 levels, some potential property investors might even think now is the time to jump into the market.
But with private property prices at an all-time high, it might be difficult to comfortably afford an investment property. And that's where REITs come in to offer an alternative to investing in property. But are the two types of investments really the same?
How Does Buying Investment Property Work?
In order to make money from an investment property, you will first need to go through the process of finding and purchasing a suitable piece of real estate. Not all properties make good investments, so attention must be paid to factors such as location and rent.
Additionally, depending on buyers' needs, the way buyers shop for homes may change—meaning what is considered a 'good location' today may not definitely hold true in the future.
The actual property purchase can take anywhere from several weeks for resale property to several years for property that is still under construction.
So, how do you monetise an investment property? The most immediate concern of most property investors is to find a tenant who can provide a good rental yield. The property can then be rented out until it is eventually sold at a profit.
What Are REITs and How Do They Work?
REITs offer a more affordable alternative to those who wish to gain exposure to the property market without actually buying property.
They are companies that own and operate real estate that produces an income, such as office space or shopping malls. By investing in a REIT, you get to enjoy the income and the capital gains generated by the REITs’ portfolio of properties.
You can invest in REITs by buying their shares on stock markets like SGX. REITs in Singapore typically pay out dividends, which enables you to enjoy passive income from your stock holdings.
Key Differences Between REITs and Investment Property
Both REITs and investing directly in a property enable you to gain exposure to the property market, but there are some significant differences between the two.
1. Initial Capital
The biggest barrier to would-be property investors is the cost. Not only is private property in Singapore quite expensive, but there are also numerous costs that must be paid in addition to the sticker price.
Purchasing private property typically requires a 25% downpayment, which can range from a six- to seven-figure sum, depending on the cost of the property being purchased. On top of that, you probably have to pay Additional Buyer’s Stamp Duty (ABSD). The amount of ABSD you have to pay depends on your citizenship status and number of properties you have:
Singapore Citizen buying first property
No need to pay ABSD
Singapore Citizen buying second property
Singapore Citizen buying third and subsequent properties
Singapore Permanent Resident (PR) buying first property
Singapore Permanent Resident (PR) buying second and subsequent properties
Foreigner buying any property
Entities (company or association) buying any property
25% (additional 5% if entity is housing developer)
Other additional costs that must be paid include legal fees, home loan interest and renovation costs.
REITs, on the other hand, are extremely accessible in terms of capital outlay. The smallest lot size on SGX is just 100 shares, which is very accessible to cash-strapped investors.
Investors must take into account brokerage fees, trading fees and commissions which can eat into their investment gains. The brokerage might also impose a minimum account size or minimum trading fee which can range from a few dollars to a few thousands of dollars.
Nowadays, there are many other ways to invest in REITs than buying shares through a traditional brokerage, such as by gaining exposure to them through a robo advisor or signing up for an investment plan. It is thus possible to invest in REITs for as little as, say, $100 a month.
2. Asset Leverage
When investing in property, an investor can take advantage of a loan or mortgage to finance a home purchase that he or she does not have the cash to pay for in full. This enables the investor to get exposure to a much bigger asset that he or she currently has the money for.
On the other hand, most lay investors do not use leverage to purchase REITs. It is possible to trade REITs on leverage but this is considered very risky.
3. Amount of Effort
Earning an income from an investment property requires a considerable amount of legwork. Before it becomes habitable, renovations are often needed. Furniture and appliances must also be purchased and installed if the property is to be rented out in a furnished state.
The investor must then find a suitable tenant. During the period of the lease, repairs and maintenance might have to be undertaken by the investor. When the tenant leaves, the investor must inspect the property for damage and then rectify any issues before searching for a new tenant.
REITs allow investors to earn an income much more passively, as dividends are simply paid into the investor’s designated account or automatically reinvested.
Property is a highly illiquid asset. Buying a resale property usually takes a minimum of two months, not counting the time spent searching for a suitable property, visiting prospective properties and negotiating prices.
When selling property for a profit, the investor will need to spend a period of time, usually weeks or months, to find a purchaser and entertain visits. The sale of the property usually takes at least two months. Seller’s Stamp Duty (SSD) is payable if the property is sold within three years of its purchase, so many sellers choose to sell only after the three-year period is over.
Buying and selling REITs, on the other hand, is done instantaneously online, with administrative issues being managed by the brokerage. This is not only more convenient but also lets the investor react more nimbly to changes in market conditions or liquidate the investment quickly if necessary.
5. Portfolio Growth and Diversification
Unless you have very deep pockets, it is difficult to diversify when investing in real estate, as you are sinking a large amount of capital into just one asset.
REITs, on the other hand, enable you to invest affordably in a portfolio of real estate properties. A single REIT already consists of a portfolio of multiple properties, and to diversify even further you can invest in several REITs at the same time. You can select REITs according to land use such as commercial or industrial, as well as property types such as shopping malls, office space, serviced apartments, factory space and so on.
6. Investment Returns and Income Tax
Any rental income earned from investment properties counts towards your income tax liabilities.
Dividends earned from REITs, on the other hand, are tax-free in Singapore.
So, if REITs are so great, why are people still investing in property? In certain circumstances, purchasing a property can yield better returns than REITs.
This is of course dependent on many factors. As mentioned earlier, not all properties make good investments, but if you buy an undervalued property during a market downturn and then sell it when the market rebounds, there’s a chance that you will make a tidy profit.
Conclusion: Invest in REITs or Property According to Your Circumstances and Preferences
REITs are much more accessible than property thanks to lower capital outlay, the lower levels of effort involved and ease of buying and selling. However, those with sufficient capital and the willingness to manage a property investment can consider investing in both REITs and property, as both types of assets have complementary strengths.
Ultimately, all investments will carry some level of risk; investing in REITs or property is no different. When deciding whether or not a REIT or property is a good investment, there are many variables in play. Before you buy, do your homework by reading comprehensive home financing guides or reaching out to one of our Home Finance Advisors for personalised advice.
More FAQ on REITs in Singapore
Which Is the Best REIT in Singapore?
Some popular Singapore REITs include but are not limited to CapitaLand Integrated Commercial Trust, Mapletree North Asia Commercial Trust, and Frasers Logistics & Industrial Trust.
Do You Pay Taxes on REITs?
In Singapore, the dividends you earn are tax-free.
Are Singapore REITs a Good Investment?
They can be as they’re much more accessible than property and have the potential for capital appreciation. For a detailed explanation, approach a financial expert.
Are REITs Better Than Stocks?
Typically, REITs have diminished performances when interest rates rise. However, in a slow economy, REITs can outperform some stocks. When in doubt, ask a financial expert for advice.
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