Why I believe Singapore REITs are a better investment than the Singapore Property Market

Disclaimer: Please note that all content and information in this blog are for educational and informational purposes only and should not be taken as professional investment advice.

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Given the high property prices in Singapore now, I believe that Singapore REITs are a better investment than the Singapore Property Market, largely due to the following four reasons:

1) Diversification

2) High Taxes

3) Liquidity 

4) Flexibility 

Pros of REITs:

a. Diversification 

REITs allow you to diversify, something which investing in properties doesn't allow you, unless you have a large enough capital base to afford multiple properties. The risk of putting your entire life savings in an investment property is rather high, especially when you buy on an uptrend, which could possibly turn into a property bubble.

b. Tax-exempt

The presence of high property taxes such as BSD and ABSD could erode the capital gains you make from investing in properties in Singapore. Even if you made 50% gains on your investment property, the ABSD alone, excluding the property agent fees and commission, could easily erode 20-30% of your 50% gains. Rental income from Singapore Properties is often eroded by the high non-owner occupied property taxes, whereas the dividend payouts by REITs are tax-exempt in Singapore.

c. Liquidity

REITs are much more liquid than property. You can easily buy and sell REITs on the market. Properties typically take weeks, if not months to sell. Liquidity is especially important during times of crisis where you can cash out from poor performing REITs, and buy into good quality REITs which are undervalued due to panic selling. 

Unlike Singapore properties, REITs allow you to quickly switch over to a different investment when necessary. It also enables you to sell a portion of your position in the REITs instead of your entire position. This is extremely difficult or almost impossible for Singapore property. The liquidity of REITs enable you to quickly cash out and reinvest the funds elsewhere, while Singapore properties don't.

d. Flexibility

Properties require large investment amounts (typically cost at least $200-400k even for the cheapest properties in Singapore, such as 2 or 3 bedroom flats). REITs enable even investors with small capital to get exposure to the Singapore property market. You can invest as little as a few hundred dollars in REITs, something which is impossible if you were to buy a property in Singapore.

Cons of REITs: 

a. Absence of Leverage

REITs do not have the element of leverage, which investing in properties generally provides through housing loans. Loans are a form of leverage which will you to grow your capital faster. 

b. Risk of Collapse

As with any stock, some REITs could potentially become terrible investments. For example, Manulife US REIT which has collapsed over 80% since 2020 till date. These are often rare cases, and if they do happen, diversifying your REITs portfolio will ensure that any a poor performing REIT will have minimal impact on your portfolio. 

Unlike some REITs, most properties in Singapore will generally not collapse so drastically in value (e.g. down 60% to 80%), unless it is a leasehold property reaching the end of its lease. Apart from that, the prices of most properties in Singapore are generally stable, although if you are looking to invest for capital gains or passive income, keep in mind the high property taxes. REITs are definitely a better alternative for passive income than investing in a property. 

Conclusion:

In conclusion, I believe that properties in Singapore are not a suitable investment for most retail investors. While it may seem like a good retirement plan (to own two properties, stay in one and rent out the other for passive income), investing in REITs can provide equal, if not better passive income at a 6-8% dividend yield each year, that is not only tax-exempt, but is much more hassle-free compared to owning and renting out a property which often entails renovation and repair costs, utilities, conservation charges as well as high non-owner occupied property taxes. 

If one still decides to go for properties as an investment, instead of owning two properties (which will incur ABSD and high non-owner occupied property taxes), you can choose to purchase a larger home (e.g. 5 room flat, a 3-4 bedroom condominium, or even better a dual-key condominium unit), and rent out the spare rooms. This allows you to collect extra passive income without the additional burden of heavy property taxes levied on investment properties in Singapore. 

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Disclaimer:

The content and information provided on this blog is solely for educational and informational purposes, and should not be construed as financial advice. The accuracy or completeness of the content and information provided in the blog cannot be guaranteed. Before making any investment decisions, it is important for readers to research and carry out independent verification of the information provided, or consult with a qualified financial professional. No warranty and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of actions taken based on the ideas or information found in this blog.

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