Are REITs really a “smarter pick” than property?

With the new cooling measures in place, property fans have started turning to Real Estate Investment Trusts (REITs) again, reports The Business Times. It’s not a new phenomenon; REITs also started to trend for a while when earlier cooling measures were announced in 2014. In fact, REITs seems to be a “go to” for investors whenever the government pokes the real estate market. But are they better? Read on to find out.

It’s not considered an either/or choice by most investors

In our experience, it’s not uncommon for property investors to have both. You’ll find many investors, for example, who rent out a condo, but also own REITs.

That’s because REITs allow them to diversify into other types of properties (e.g. industrial), which are a whole different ball game.

An investor who’s comfortable with residential properties might directly buy and rent out condos — but that same investor may not understand, say, office properties.

So it makes sense for that investor to buy office REITs (in which a professional manager runs the show) while directly handling the residential properties in his/her portfolio.

To use an analogy, you should think of REITs and properties as being different tools in an investor’s toolbox. A hammer may be appropriate than a drill for some situations, but it’s not reasonable to say that a hammer is objectively better than a drill, or vice versa. In the same way, it doesn’t make sense to declare whether REITs or actual properties are “objectively” better.

A better question to ask is WHEN you should invest in REITs, versus properties

At the time of writing, more investors are turning to REITs. This is not surprising, as many are adopting a “wait and see” approach to gauge the full effect of the cooling measures.

The other factor is that there are many good REITs dealing with different commercial properties. Office spaces, retail spaces, industrial facilities, etc. are mostly untouched by the cooling measures, which targeted residential assets. As such, many investors theorise that commercial properties will present better value right now.

Investors who believe this like to seek exposure to the market through REITs. Because again, residential investors may lack the specialised knowledge to directly buy and manage commercial properties.

In a situational sense — and by that we mean right now, in September 2018 – REITs seem a safer choice for many investors. At least until we can see how the residential market copes with the new measures.

That being said, there are also many investors who still prefer physical properties over REITs, with good reasons.

There are 5 key advantages that real properties have over REITs

• Potentially better returns

• Direct management

• Better leveraging

• Reassurance from direct ownership

• You can use real property as something other than a financial asset

1. Potentially better returns

Some investors believe they can still find good properties, even during a downturn (sometimes, especially during a downturn.)

These investors continue to trawl the residential markets, for properties with unrecognised value. If they’re able to find any, their returns will probably be higher than what they get from investing in any REIT.

One assertion among these investors is that it’s easier to find an undervalued property than to find an undervalued REIT. Because REITs are monitored by so many investors, it’s highly improbable that a REIT will ever sell for cheaper than its actual value.

With individual houses however, this happens all the time. The available information on specific properties is less “perfect” than the available information on REITs. For example, buyers may miss the fact that a unit has a better view than others in the same block, or that the opening of a nearby office will ensure constant rental demand.Of course, this assumes that the investor is experienced enough to identify such properties, and has time to do a lot of footwork.

2. Direct management

There is a general divide between investors here. Some prefer the fact that REITs are managed by a full time professional, as they have no expertise in that REIT’s particular market. This may be the entire reason they invest in a REIT instead of directly in the property.

On the other hand, there are property investors who loathe paying REIT managers (and you do pay them, their fees come out of your returns). Some investors see an inherent problem here, as REIT managers are effectively paid based on the number of properties managed.

The higher the value of the REIT’s assets, the more the manager gets paid. This can be problematic, such as if the REIT manager starts buying up properties for the sole purpose of charging higher fees instead of generating better returns for the investors. Suspicious investors point out that, if a REIT crashes and burns, the people running it won’t have to pay back a single cent of their fees and bonuses.

Of course, not all REITs are run this way, and if they were no one would be investing in them right now. But it comes down to individual investor mindsets: if you’re okay with how REITs charge you, then this is a non-issue. But if you don’t trust managers, then physical property will set your mind at ease.

3. Better leveraging

When you buy actual property, you’re able to borrow a lot of money at a rock-bottom interest rate. For the average Singaporean, buying a property is the only time we’re able to borrow more than a million dollars to invest.

Try asking your bank for a $1 million loan at 1.6% interest to invest in REITs or other stocks — they’ll probably kick you out before even offering the free mineral water.

4. Reassurance from direct ownership

Singapore has very low corruption rates, but REITs still require a higher level of trust than owning the actual property.

Embezzlement, fake assets, kickbacks from developers, creative accounting… all the white-collar crimes that can suddenly bring down a company can also happen to a REIT. And when that happens, investors are usually lucky to get back even a fraction of their money.

When you buy the actual property, you’re in full control. You have the actual title deed, you know all about the relevant debts, and you have a physical structure that you can claim to own.

Some investors prefer property investment for precisely this reason, so REITs won’t appeal to them.

5. You can use real property as something other than a financial asset

This is not really an investment factor, but we include it just because many property investors raise the point.

When you own a house, you can use it for purposes other than money. You can choose to forego a few years of rent, to let your newly married child raise a family in it. You can choose to use it a vacation home for a long sabbatical (if it’s overseas), or you can choose to move into it and rent out your current home instead.

This provides a degree of flexibility in how you utilise your asset, as opposed to a REIT.

Source: 1 year ago, 99.co Property News