The Singapore real estate market is ranked as the world’s second most expensive after Hong Kong. Owning a private property in Singapore is rather costly and makes property investment out of reach for many. Many of us simply do not have the resources to invest in the real estate market and earn a steady stream of passive income generated by the rentals.
However, one can invest into Real Estate Investment Trusts (REITs) as a less costly alternative. Singapore REITs (S-REITs) use shareholders’ money to buy, operate and manage properties locally and are listed on the Singapore Exchange (SGX). When you invest in a S-REIT, you are basically investing in the properties that are managed by that REIT. Rental income earned by that REIT will be paid to you in the form of dividends. Dividends are usually paid annually or semi-annually, though some REITs pay out monthly dividends.
Singapore has the second largest REIT market in Asia after Japan. Currently, there are 42 S-REITs and property trusts with a total market capitalisation of around S$100 billion. These companies are required to distribute at least 90% of their taxable income to upholders in order to qualify for tax transparency treatment.
Among the S-REITs are well-known names like CDL Hospitality Trust, Frasers Centerpoint Trust, Mapletree Logistics Trust. Ascott REIT and CapitaLand Mall Trust.
Today we look at the differences in investing in physical properties and S-REITs.
As real estate in Singapore in very costly, you will need a fair bit of upfront capital. If you are buying your first private condo, there is a 20% downpayment, with 5% in cash. The remaining 15% can be paid using your CPF funds. If you are buying a second property, the cash downpayment is 25% of the property’s valuation limit. So if the second property you are buying is valued at S$1.5 million, you’d need $375,000 cash for down payment. You are also required to pay an additional buyer’s stamp duty (ABSD) of 12% when you buy a second residential property if you are a Singapore citizen.
The average rental yield for residential properties is between 2% to 3%, which is higher than banks’ interest. However, bear in mind that renting out a property requires maintenance and repairs, and you will need time and effort to look for tenants. Also, if you have a property agent servicing you, you’ll need to pay commission. All these will eat into the rental you collect.
Then there are taxes. You will have to pay income tax on the rental income from your property, in addition to property taxes.
On the other hand, S-REITs have a much lower cost of entry. For example, the cost per share of CapitaLand Mall Trust (CMT) is $2.33 as at 18 January 2021. So if you purchase 1,000 units in CMT, you only need to pay $2,330 (before brokerage fees and other fees).
Investing in REITs is as simple as ABC. You just need to open an individual account with The Central Depository (Pte) Limited (CDP) and set up a trading account with the brokerage firm of your choice. It might be possible to do both at the same time with your broker. However, choosing the right REIT is not as simple. Things you must consider carefully are the quality of their properties, the occupancy rate and the distribution yield.
On average, the dividend yield of Singapore REITs is around 6.5%. Some S-REITs yield could be as high as 15%. From a yield perspective, S-REITs are a more attractive option as you do not have to worry about maintenance and repairs and looking for tenants as all these are done by the S-REIT.
Dividends paid out by REITs are also tax-free. You get to keep every cent you received from the dividends paid by the REITs.
Investing in both physical properties and REITs both have their merits. If you have both resources and time, physical properties may give a much higher capital gain, especially if the real estate market picks up. REITS, on the other hand, are professionally managed and you do not have to bother about tenants and the maintenance issue.
Ultimately, whether you invest in physical properties or REITs, it is a good source of passive income but as in all investments, do your own diligence.