Singaporeans prefer purchasing properties as investments. Just take a look at the real estate market, and you’ll see all those new condo units sell like crazy.
However, you don’t have to buy physical properties to invest in real estate, the alternative being to invest in REITs.
A REIT stands for Real Estate Investment Trust and it is a company that owns real estate properties and manages them, the purpose being to generate profit. These properties are listed in Singapore Stock Exchange (SGX).
An S-REIT may own various types of properties. They may invest in office towers and retail malls, as well as in hotels, healthcare institutions or even residential property. The REIT is traded on the SGX just like regular shares.
CapitaLand Mall Trust is one of the best examples. Their portfolio of properties includes shopping malls such as Bugis Junction, Junction 8, IMM, Raffles City and Plaza Singapura. By buying their shares, you can invest in these malls, too.
With a present market capitalization of almost S$7 billion, this is the first-ever REIT listed in Singapore. It was founded in July 2002.
Here are 5 benefits of investing in REITs instead of buying physical properties.
1. Portfolio Diversification
As most REITs own multiple properties with a wide variety of tenant pools, they reduce the risk of relying on a single source of profit. When you own only one property, your profit depends on your ability to have it occupied by tenants for as much time as possible. What if the MRT station next to your property closes down? Your tenants are going to leave you, and the value of your property is going to decrease. This risk is diluted when you invest in a REIT owning multiple properties.
It is possible to diversify even further by choosing REITs to invest in based on the type of property you are interested in. Singapore-listed REITs have a very good portfolio diversity, both inside the country and abroad.
2. Affordability
If you are a small investor, you may not have enough purchasing power to invest in very expensive properties. By choosing to invest in REITs, you can become the owner of a fraction of these profitable, but expensive properties. You can own shares in all major shopping malls in China, for instance, without having to physically purchase these assets.
3. Liquidity
When you invest in REITs, you can sell the very quickly, should you ever need some cash for emergencies. Physical properties are much more difficult to sell, and the process may take many weeks or even months. REITs are listed on the stock exchange, so you can trade their shares throughout the trading day. You can obtain your needed cash with ease.
4. Tax Advantages
Individual investors in REITs receive dividends that are nothing else than a tax-exempt distribution.
5. Transparency & Versatility
Whenever you buy or sell a REIT, you enjoy a fully transparent and flexible process, identical to the process of trading stocks listed on the exchange. Investors can get information on REIT prices and buy or sell them throughout the trading day. Also, REITs are controlled and monitored by third parties, this being a guarantee of their honesty. This leads to an excellent level of transparency, as all investors can access this information whenever they need it, to make sure the REITs they want to invest in are compliant with the local laws and regulations.
Of course, investing in REITs is not without any risk. Here are a few of the risks you can expect:
1. Market Risk
As REITs are traded on the stock exchange, their price is subject to the same fluctuations as the price of any other stocks. You can invest in a REIT, and lose money at the end of the day.
These prices reflect the confidence investors have in the economy of their country, the evolution of the real estate market the interest rates, and also the management of the REIT among other factors. Investors should be prepared to tolerate price fluctuations.
2. Income Risk
A REIT that doesn’t make a profit may not pay dividends to investors. Such situations may arise when the occupancy rate falls or when tenancy agreements have to be renewed at lower rental rates.
Before investing in a REIT, you should check whether the management has secured upfront payments or other similar conditions meant to secure a certain profitability. Whenever underlying properties are financed by debt, there’s a risk of refinancing at different interest rates. When the cost of debt increases, unit holders receive less income.
This article was contributed by Dr Wealth, an investor-centric platform providing investor education and portfolio management tools. They have launched their mobile app investor tool recently, Dr Wealth Portfolio Tracker, which provides investors with access to two essential and important trackers – Dividend Tracking and Portfolio Benchmarking. It’s free to download on Android Google Play store.
