Property or real estate – is one of less liquid assets in comparison to financial instruments such as – Fixed Deposits, bonds and shares (note warrants, CFD, options are not investment instruments but hedging tools). Investment in Real Estate may take different forms, REIT, Land Banking to buying a residential property rent out, even own stay units (can classify for investment due to capital gains).
Specifically highlighting property funds such as REITs which are professionally managed portfolio of real estate, has been all the rage, but with the volatility of the stock markets, is it still a good investment tool, or can we see it more for diversification of our equity portfolios instead.
What’s in it for the Property Investor investing Directly into a property
- Generate capital growth – increase in the value of your property over time
- Generate rental income and yield – annual rental income less any costs divided by the purchase price of the property
- Potential tax advantages – investment costs like Capital Improvements, Interest Costs can be offset for tax
Whats in it for an Investor investing in a Property fund – like REIT
- Less hassle, and do not need to manage property directly
- More flexible for liquidity purposes – able to buy and sell units on the market more quickly than fixed real estate
- Good diversification tool for overseas property investment
Downsides of REITS are:
- Less control of the property investment, as decisions are made by the Trustees (and not the unit holders)
- Income from the investment is more spaced apart, cash flow is slower
- Capital gains may be influenced by other factors like Market Volatility
In my own personal opinion, REITS are good as a diversification, but not good as an investment vehicle for Capital Gains. REITS rely heavily on Rental paid by tenants for income, when the market changes to an climate of oversupply (which we are experiencing now), rental income will ultimately slide. And coupled with this reduction in income, we have to distribute this with various parties or layers of people. Let us investigate the structure of the REIT to have a better understanding of this.
As we can see – there are many parties that are “leaching” the profits from the unit holders, and much of this is beyond the unit holder’s ability to control. Currently much of the REITs are mostly commercial and industrial REITs some are Hospitality REITs. The current climate is not very favourable towards the Industrial REITs or Commercial REITs as we are facing an oversupply situation, especially in the Industrial properties sector. Even Raffles place is seeing additional supply coming online with the completion of CapitaGreen (the new Capitaland Grade A space in the heart of Raffles Place)
Rising Interest Rates
To add to that, we are at the tapering end of the U.S. Qualitative Easing. Many are expecting the Federal Reserve to raise interest rates, it is no longer a question of “IF” but a question of “WHEN”, the situation of CHEAP MONEY is no longer possible and this will ultimately squeeze the REITs that are not performing as well. As interest rates rise, prices of equities as well as REITs generally will fall marginally, it may not be across the board. Some investors will partake in dollar cost averaging, but it just increases your exposure to a declining sector.
Investment Strategy for Property
When starting to invest in property it’s important to be clear on your property investment strategy. Are you going for high rental returns for the short term or are you going for long term capital growth? In the Singapore context, for long term investments, truly nothing is better than real estate (as in the fixed assets). The argument is simple, land scarcity, increasing population, increasing economic growth, in the medium to long term, it is still a much better investment. At this juncture there are lots of opportunities in the Real Estate market, which are selling below market value and have great potential for upside when the market recovers. The current slow property market is a result of the cooling measures, and specifically the TDSR, which affects individuals ability to own multiple properties. Given that our new Minister for National Development – Lawrence Wong wants to keep the cooling measures and the Primary Supply of HDB BTOs ample, to maintain a soft real estate market.
Especially in the popular enclaves of foreign investors, prices have been sliding, new launches are providing strong reasons for purchase, like the soon to be launched Principal Garden with 1 bedroom units with a starting price of $770K just minutes away from Redhill MRT and just a few stops to Raffles Place, makes it a very attractive investment property at an affordable price.
We as investors understand this predicament. For interested parties, we can share our investment strategies, and why the cooling measure is good for buyers.
Additional reading and useful resources: