You have S$250k in cash, should you buy REITs or a Singapore property?

For investors in Singapore who have the financial means, one of the age old questions has always been whether to invest in REITs or a property. Here, we look at a few things to consider.

But before that, let’s have a look at the price history.

There is no doubt that property prices have done well. The Property Price Index of private residential properties has risen from an index of 137.6 to 180.9, a 31.4% gain in just under 5 years.

Similarly, the rental index of private residential properties has risen from an index of 103.4 to 127.0, a 22.8% gain in a similar timeframe. An investor who bought an investment property in 2017, would not only have seen capital gains but also increased rental income.

Looking at the iEdge S-REIT Total Return Index, which tracks the performance of the most liquid REITs listed on SGX, the REIT index has also done pretty well with a total return of 33.8% across 5 years, but this was mainly due to dividends of about 28.1%, with capital gains contributing 5.7% over this time period. This would mean that many of the REITs that comprise this index would have also done well.

The top 10 constituents of the iEdge S-REIT index is listed below for reference:

REITs vs Property: Which provides better returns?

This means that buying a residential property would have outperformed buying the REIT index as the property value has gained 31.4%, combined with an estimated net rental yield of about 2.3% per annum, total returns is about 42.9%, as compared to the REIT index which delivered a 33.8% return.

Of course, the reality is not as simple. Investing in residential property would incur costs in the form of stamp duty and taxation on rental income which are much higher expenses as compared to investing in REITs which would only incur brokerage fees.

Assuming that you are in a position to freely buy a property and are not facing restrictions such as lock up periods or taxes such as the additional buyer stamp duty, here are seven things to think about.

7 considerations to take when choosing between REITs and Property

1) Potential returns – with leverage

Although you can leverage on both types of investments, it is much easier to leverage on property. This is because share prices may fluctuate substantially, and investors may face margin calls which would require additional funds to be placed into the trading account and this would lower the leverage multiple.

While there is also a risk of margin call on property, it is more unlikely to happen as private residential property prices in Singapore has generally not seen substantial and prolonged downturns in the recent years.

Nevertheless, should an investor be astute enough to manage leverage in both types of investment equally, then this would not be an issue.

2) Recurring cashflow

From a cash inflow perspective, a property provides monthly rental income while a REIT only provides quarterly or semi annual dividends.

From a cash outflow perspective, repair and maintenance is ad-hoc while equity fund raisings from REITs happens once ever few years.

3) Liquidity of capital

Needless to say, the REIT investment beats the property investment hands down in this aspect. It is much easier to sell a REIT in the open market and in piece meal.

4) Diversification

Similarly, the REIT investment beats the property investment hands down in this aspect. Investing into a REIT index is by default a form of diversification. It is also much easier to diversify when investing into a REIT as one could invest in a few REITs. REITs provide diversification in asset class, geographic region, company and tenant risk exposure.

5) Timing

For the astute investor who is able to grasp the timing of opportunities, there is no difference as the investor can control the timing of the investment. For the average investor, it is much easier to carry out a dollar cost averaging method of investing or buy the dip method on REITs.

Of course, one may say that for private residential properties in Singapore, the best time to invest is always yesterday because it seems like prices only go up!

6) Recurring efforts

An initial investment requires effort regardless of the nature of the investment, but some requires much more recurring effort.

An investment property requires a considerable amount of effort to manage the property. The property must be in a good condition to lease, and a tenant must be found. There could be vacant periods and investors would have to either source for a tenant themselves or hire an agent which would incur fees as high as 8% of gross rental income. Tenants would also have to be managed and if there are any physical damages, whether through natural wear and tear or malicious occurrence, these would have to be resolved.

On the other hand, buying into a REIT or REIT index allows investors to earn an income much more passively, as dividends are simply paid to the investor or automatically reinvested.

7) Tax implications

Generally, if the investment into REITs is carried out in a personal capacity, there are no additional taxes on the investor on either dividends or capital gains.

There are also no capital gains tax on the investment property, but rental income (less eligible expenses) will form part of the assessable income of the individual and taxed at the relevant personal income tax rate which could range from 0% to 24%.

Closing statement

Things to consider	REIT	Property
Potential returns	✓	✓ ✓ ✓
Recurring cashflow	✓	✓ ✓
Liquidity of capital	✓
Diversification	✓
Timing	✓
Recurring efforts	✓
Tax implications	✓

We have looked at 7 things to consider when choosing between investing a REIT or a property. Of the 7 things, an investment property is a much better option as compared to a REIT when it comes to potential returns and recurring cashflow. This is because of the natural ease of leverage that come with securing a loan to purchase an investment property.

However, should an investor require liquidity of capital, diversification and is concern over the timing of investment, recurring efforts required to manage the investment and potential tax implications, then investing in a REIT may be a much better choice.

Hence, although an investor may be tempted by the potential returns and cashflow from an investment property, the investor must first consider the other 7 things listed here which investing in a property does not provide. The investor should go for the investment property only after considering and accepting the other 7 things, otherwise, investing in a REIT may be a better alternative to an investment property. Do note that there are also other personal extenuating circumstances to consider and certain options may be closed off or impractical to you due to such circumstances.