Why would an investor consider a Reit instead of physical property?
Ms Lee Wen Ching, Director, Chief Investment Office, UBS Wealth Management:
Firstly, Reits are liquid and easily traded over an exchange. Pricing is also more transparent for this reason.
Secondly, a Reit offers an investor exposure to a basket of assets, whereas when an investor purchases a physical property, his or her investment exposure is constrained to the unit that is being purchased.
Thirdly, the quantum of investment is much lower for Reits as compared to physical property.
Nicholas Mak, Executive Director & Chief Investment Officer, zacd:
Investors also get a regular income as Reits listed on SGX invest in income generating assets and must pay out at least 90 per cent of their income as dividends to minimise taxes.
How have Reits performed?
Mr Geoff Howie, Market Strategist, Singapore Exchange:
Together, the 32 Reits and six stapled securities of Singapore's Reit Sector maintain the highest dividend yields of the region and distributed approximately $4 billion in dividend distributions in 2015.
What have returns been for Reits on average?
Prior to the three Reits which joined the listing this year, the return has been at 11.2 per cent for the remaining 29 Reits and six stapled securities, according to the SGX report.
How does that compare with the average rental yield here?
Rental yields for residential properties here hover around 2.5 per cent.
The average rental yields for commercial properties range between 2.7 and 4 per cent depending on whether the property is located in the Core Central Region (CCR), Rest of Central Region (RCR) or Outside Central Region (OCR).
What about taxes?
Income distribution from Reits (dividends) are not taxable except distributions derived by individuals through a partnership in Singapore, or from the carrying on of a trade, business or profession in Reits.
Physical properties incur Buyer Stamp Duty (BSD) and Additional Buyer Stamp Duty (ABSD) when purchasing.
Then there's the annual property tax. Non-residential properties (commercial and industrial) are taxed at 10 per cent of the property's annual value.
There's also tax on rental income.
Is there an even more passive option for investing in property?
SGX is planning to launch an S-Reits exchange-traded fund (ETF) in the second half of 2016.
In an interview with The Business Times, SGX's head of research and products Chan Kum Kong says: "We have been working with a couple of issuers to launch an S-Reit ETF for investors but, more specifically, with the aim of providing (through the ETF) a retirement solution for retail investors here."
The ETF will track the performance of the SGX S-Reit 20 Index launched last December, which measures the performance of the 20 largest and most tradable S-Reits listed on the local bourse, reported BT.
The Index has generated a total return of 15.5 per cent this year through July 29.
Can Reits' high yield continue?
Income-seeking investors should be aware of the impact that interest rates can have on their portfolio.
Bond prices trade inversely with interest rates; the same applies to Reits and yield stocks in general.
In an environment of rising interest rates, yield stocks tend to under-perform.
What are the advantages and disadvantages of investing in Reits and physical properties?
Mr Nicholas Mak, executive director & chief investment officer at zacd, pointed out:
Pluses about Reits
l More liquid
l Diversify an investment portfolio
l Diversify a real estate portfolio
l Low investment sum needed
l Lower cost and search time compared to buying properties
l Like all securities, the investor is entrusting his investment in the hands of the Reits' managers, who may or may not always act in the investor's best interests.
l The investor has no control over the purchase, management and disposal of assets in the Reits' portfolios.
l The Reits' strategy is to keep assets for recurring income so the investor will not enjoy much capital gains.
Pluses about properties
l Receive rental income directly from the tenant
l Enjoy capital gains
l Acquisition can be financed by borrowing
l More illiquid than securities
l Not much diversification as most people can afford only one or two properties
l Relatively large sum of money needed for each property
l The investor has to spend time and expenses to search for a suitable property and examine the feasibility of the property as well.
l There are many taxes for real estate: Additional Buyer Stamp Duty, Seller's Stamp Duty, property tax and income tax on the rental income received.
This article was first published on Aug 7, 2016.
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