Learning to Invest in REITs – Part 2:
Investing in SREITs versus Physical Property
Tax, liquidity and diversification
One of the main advantage of investing in SREITs versus investing in physical properties (e.g. residential apartment) is that SREITs dividends are distributed to its investors tax free while rental income from residential apartment are subjected to property tax of 10% and then income tax.
In addition, investors in SREITs do not have to pay property transaction stamp duties while investors of residential apartments have to pay a normal property transaction stamp duty (slightly less than 3% of the transaction amount) and may even have to pay an Additional Buyers Stamp Duty (ABSD) if the investor has more than one residential apartment.
Other than the tax advantages that SREITs confer, SREITs investments also have the advantage of having a very low minimum investment amount and good daily liquidity. Investors can invest in SREITs like normal listed Singapore shares in minimum lot of 100 shares, which makes the minimum investment amount required for SREITs small (normally few hundred dollars). In addition, the daily liquidity for most SREITs are generally pretty good, which means investors can enter and exit out of SREITs easily on a daily basis. On the other hand, investing in a residential apartment nowadays would easily require an investment amount north of SGD 1 million and the process of selling the apartment would typically take 3-6 months.
Moreover, SREITs’ assets typically consist of a diversified property portfolio consisting of more than 5 investment properties. This means investing in a single SREIT will already provide investors exposure to a diversified portfolio of investment properties, thus lowering the risk that the investment will be hit by idiosyncratic factors relating to a single property (e.g. fire at one of the property). The low minimum investment amount for SREITs would also allow investors to easily build a diversified investment portfolio consisting of different types of SREITs (e.g retail, industrial, office and hotel SREITs), thus further diversifying the investor’s property exposure. Such a diversified property exposure is generally preferable to investing in physical properties that generally narrow your investment to one investment property (unless you have a large sum of funds to invest in the first place).
However, one of the disadvantages of investing in SREITs is that investors would have to pay the SREIT property manager a management fee, which is deducted from the SREIT rental income. The management fee is normally around 1% of the assets under management (AUM) of the SREIT. Some of SREIT managers may choose to take the management fee in cash or in the form of new units of the SREITs. As a reference, most unit trust funds (equity and fixed income) also typically charge a management fee of at least 1%.
Despite the many advantages of investing in SREITs versus physical residential property, residential property investments continue to be one of the most popular investments among Singaporeans. This is most likely due to the expectation of potential large gains of more than the downpayment made on the residential property in the event residential property price rises. However, investors must bear in mind that such potential large gains of investing in physical residential property is only likely due to the use of leverage. And leverage is a double-edged sword that can result in both potential outsized gains and losses.