When it comes to investment, ask around and you'd know that most Singaporeans hope to invest in property if they can afford it. Given the historical returns of property investments in the land-scarce nation, as well as evidence of property as a great investment choice for the some of the richest people in Singapore, it continues to rank as one of the top investment choice.
However, investing in a property comes at a hefty price here. Being one of the most expensive places in the world to own a property, it is hard to buy an investment property without deep pockets. Luckily, there are a number of ways you can have your pie and eat it too without going the traditional way of buying a physical property. Here are a few alternatives for the savvy investor who is looking to take exposure to the lucrative property market here.
If you have been dabbling in stocks, you would probably have heard of the term “REITs.” REITs are real estate investment trusts, a structure where investors can buy shares of companies which own or manage a portfolio of income-producing real estate. REITs trade like shares and are popular with yield-hunting investors because they provide regular dividend income.
The advantages of investing in REITs are obvious – you can take exposure to the property market with “bite-sized chunks”, you need a significantly lower capital compared to buying a property, the investment is liquid and you can even choose to take a sub-sector of the real estate market(such as residential or hospitality).
REITs are probably one of the most accessible ways for one to invest in real estate. The upfront cost is low and there is little to zero management needed. Do take note of the risk though; which can be both macro and micro in nature. For instance, a change in government policies regulating real estate can impact REITs' pricing across the board. Interest rate hikes can also cause price volatility and colour the near-term outlook for the sector.
Investing in property stocks is perhaps one of the easiest and straightforward way for one to invest in the property market without buying real estate. Property counters are typically companies that hold a number of properties under them and either lease them out or can choose to sell them. Like many other listed companies, the property counter you are looking at may have their hands in other businesses as well, which can affect the overall valuation of the stock. Be sure to understand the fundamentals of the company before you invest in one.
Comparing between property counters and REITs, one of the major difference is that it is mandatory for REITs to pay out at least 90% of their net income after tax as dividend while it is largely up to the management of property counters to pay out dividends. REITS are also tax-exempt, unlike property stocks, but they are subjected to management fees that will be deducted from their yields before the dividend distributions.
Property Exchange-traded Fund
An ETF is a type of fund which pulls together money from many investors to own an underlying asset (shares of stocks, bonds, stock index, gold, foreign currency, etc.) and divides the ownership of these assets into shares. It may sound complicated but ETF generally trades much like a listed stock and you can buy and sell them in the same way as stocks. The Singapore Exchange announced recently that they will offer a new REIT ETF in the later part of 2016 and has now launched an index that tracks a basket of 30 REITS across the APAC region in preparation for the launch. Considering that the Index is based on REITs from various countries, you get to diversify your risks and also capture returns from countries that have higher-yielding properties.
Real Estate crowd-funding
Crowdfunding has been a huge enabler in the past few years and it is finally coming to the real estate industry. In Singapore, real-estate crowdfunding is considered to be in infancy, seeing just a handful of platforms here offering investors a taste of how it works.
Real estate crowdfunding works by collecting small amounts of money from individuals using an online platform, after which the pooled amount can be used to fund developing real estate projects. Depending on the project, investors can look towards earning high-interest rates between 6 to 20% on the amount they put up for the crowdfunding (usually between $10,000 to $50,000). The promises of high-interest rate returns is perhaps the key attractive feature to take on the risk of real estate crowdfunding, considering how low the local banks are offering you to put your money in their savings account. However, undertaking an investment using property crowdfunding comes with high risks.
Firstly, most of the developers using such platforms are boutique developers, so the risk of failure is higher. They may not complete the project on time, or the project might drag out and need more funds. Even the crowdfunding platforms can't guarantee the success of the deal, nor are they liable if the project goes down the drain. While there have been many successful projects carried out via real estate crowdfunding platforms in Singapore, there has also been cases where similar schemes have gone sour.
There you have it! Buying a physical property is not the only way for you to invest in the lucrative property market in Singapore. In fact, there are a variety of ways that require less capital, a shorter investment horizon and provides a more liquid market. If you would like to get started online, check out our recommended online trading platforms. As with any other asset classes, remember to do enough research before undertaking any investments!