What is the difference between investing in rental properties and Singapore Real Estate Investment Trust (s-REITs)?
Real estate investments in Singapore have always been very popular due to the scarce land space in the country which led to real estate prices in Singapore to soar over the years as demand for real estate continues to increase.
There are 2 ways you can invest in real estate –
(1) Purchasing rental properties or
(2) Investing in REITs through the Singapore Stocks Exchange (SGX).
However, these two ways of investment are vastly different which we will be discussing in this article.
What is a REIT?
A real estate investment trust is usually a portfolio of income-generating properties pooled together to offer shareholders to profit from its income and appreciation of the properties in the REIT. Investors will earn rental yield from the REIT which is distributed as dividends.
In Singapore, REITs are required to distribute more than 90% of their taxable income annually, allowing investors to earn passive income. Some notable REIT companies in Singapore includes Ascendas, Mapletree, CapitaLand and Keppel Corporation.
1. Required Capital for Entry
For investment in rental properties, purchasing your first rental property will require a 25% down payment, where 5% is paid in cash. The remaining 20% can be paid either with Cash or CPF. Subsequent properties will require a minimum down payment of 55%. For example, you purchase a condominium which cost $2 million, the required capital will be:
$2,000,000 x 55% = $1,100,000.
For investment in REITs, the required capital to invest will be significantly lower. Taking Mapletree Commercial Trust (MCT) REIT as an example, which includes asset such as VivoCity, a share of this REIT is priced at $2.05. Since the minimum lot size purchase is 100 shares, the minimum cost of investing in MCT is $2.05 x 100= $205 without the inclusion of brokerage fees. Investors will also be able to diversify in a different asset class with lower capital as there are commercial, industrial and data centre REITs listed in SGX.
2. Management of Real Estate
Managing your REIT and rental properties are different as REIT will require little management from the investor since it is professionally managed by the REIT manager and property manager from the REIT company to implement asset enhancement initiatives (AEI) and maximize rental yields. Cost of investing in REITs will only be the brokerage and transaction fee when buying and selling your REIT units. Additionally, dividends from REIT is not subjected to tax in Singapore unlike rental income from rental properties which are subjected to income tax. In the case of investing in rental properties, investors will have more control over their assets and will hold the sole responsibility for its own assets. Managing rental properties involves costs such as agent fee, property tax, income tax, maintenance fee and mortgage interest cost which are costs that are not bear by s-REIT investors. Furthermore, managing rental properties involves a lot of time and effort.
Income generated from Real Estate
To compare the income generated from REIT and rental properties, we look at the 5-Years comparison between MCT and the award-winning condominium, The Interlace. We take the transaction prices of The Interlace from Urban Redevelopment Authority (URA) of similar dwelling types and share prices of MCT over the past 5 years.
From the table above, you can see that owning a rental property may still give you a great capital gain which you are able to capitalize on if you choose the right rental property to invest in. However, REITs still give a better yield as compared to rental properties. Based on research, the average yield for REITs is 6.5% p.a while rental properties gives a yield of 2% – 3% p.a.
On the other hand, purchasing rental properties allows you to leverage on loans to capitalize on the capital gain, which is not doable for REITs. However, leveraging will also subject you to interest-rate risk. In today’s low-interest rate environment due to COVID-19, it is a good time to invest in rental properties.
Liquidity is often brought into discussion when investing in real estate. However, the introduction of REITs has changed this norm as people are now able to buy and sell them on SGX easily, which offers investors liquidity when investing in REITs. However, rental property is an illiquid asset as it will require time to find the right buyer to purchase your property as your desired price. A rushed sale of your rental property will usually lead you to lose out on capital gains as you will sell your property below your valuation.
REITs, like stocks, are affected by market conditions which lead to investors exposing themselves to volatility risk. For example, many investors of REITs were affected by the dip in share prices due to recent COVID-19 pandemic as investors panic sell their shares in mid-March. Whereas for rental properties, they are not subjected to such market risk.
These two ways of investments can provide you with a significantly stable passive income and put you a step closer towards your financial goal.
Owning REITs allows you to invest with low minimum capital, low commitment and flexibility of selling your shares easily on the market. While investing in rental properties can potentially give you a higher capital gain and give you more control over management decisions to optimize your asset to give you better returns. With these facts, I hope you are better equipped to make more inform investment decision in real estate to pursue a strategy that best fits you.