Aug 27

…in the same issue of ‘Today’, Valerie Law shed some light on REITs as well. REITs are Real Estate Investment Trusts, which have the advantage of letting you take part in the estate boom in areas around the globe, without physically investing there in form of buying an apartment or house. Thus, your investment is more liquide and you can pull out any time, if necessary.

I see REITs as an interesting investment vehicle especially for us foreigners, who aren’t easily allowed to buy real estate in certain asia countries.The estate boom is nevertheless quite obvious and for people to take part in it, there are rarely other options:

How To Ride The Property Wave
Different instruments have different risks, considerations
by Valerie Law

REAL estate and investments linked to it are becoming more valued as ways to diversify one’s portfolio, given the asset class’ negative or low correlation with general equities.

While a vast majority of Singaporeans own their own homes, representing anything from 40 per cent to 80 per cent of their net worth, personal residences do not fit into the traditional definition of an investment asset.

For an asset to be considered an investment, it must meet two criteria:
The asset must have a tangible value that can be exchanged for cash, and the only reason for holding the asset is to generate a gain, earn cash flow or both. Since we live in our homes, this does not satisfy the second condition, said investment director Victor Wong of local financial advisory firm Financial Alliance.

However, buying physical property involves high capital investment, which can run into millions. This puts the asset class out of reach of most retail investors, said Mr John Snowden, head of property securities at Colonial First State Investments.

“Investors are also likely to face the problem of liquidity as the property market is a lot less liquid than the property securities market,”
he said.

The more accessible investment classes derived from real estate would be listed property stocks, real estate investment trusts (Reits) or property unit trusts.

A listed property company, due to its involvement in different stages of a property – from developing, managing, buying and selling to renting out – tends to bear higher risk if its development projects fail or market sentiment turns sour upon completion of the project.

“Property stocks tend to be involved in development activities that entail higher risks and returns (than Reits),” said Professor Ong Seow Eng at the Real Estate Department of the National University of Singapore.

A Reit is a publicly traded entity that is engaged in owning, managing and enhancing investment-grade real estate. Reits in Singapore invest and own properties, and earn from their disposal, rental or both.

The primary difference between a Reit and a listed real-estate company is that the latter distributes the majority of its income – up to 90 per cent in Singapore – to its investors.

Reits are also not subject to corporate tax on their net profit if they distribute at least 90 per cent of their income, while their unit holders are not taxed on the distribution income that they receive from the trusts.

The differences do not stop there. Property trusts have to satisfy other requirements set forth by regulators, such as maintaining a debt-to-asset ratio at 35 per cent.

Of the two investments, property stocks are probably more volatile, mirroring the economic cycle, said Mr Wong.

“Reits are becoming popular now as income-yielding securities. However, the Reits market is still young in Singapore and it remains to be seen whether the current Reits reflect adequate risk premium as investors chase such securities for yield,” he said. “Even for an aggressive investor, I reckon property (stocks) and Reits should not make up more than 20 per cent of his/her equity portfolio.”

Typically, stocks are the first to move in any bull market so when the property market is expected to do well, property stocks are usually the first to run up, noted Prof Ong. Reits being income-driven stocks will lag a little behind property stocks.

Nevertheless, expectations of future increases in cash flow from rents, and expectation of future increases in property prices will drive Reit prices up as well, he said.

However, Reits should be viewed as income-generating instruments rather than capital gain plays, said Prof Ong.

“Many investors who had witnessed a strong move in Reit stock prices over the past year should recognise that Reits are fundamentally income oriented stocks, especially as interest rates move up and Reit yields become compressed,” he said.

Merely buying a single listed property company or a Reit to form the bulk of this asset class does not necessarily provide for geographic or property type diversifications, Mr Wong said. The solution would be to buy into property funds, since many investors today are unlikely to have enough time and expertise to shop around for different types of real estate in different parts of the world.

Mr Snowden concurred: “Although some Reits do offer some form of exposure across segments, they are still very much focused on specific segments and do not offer the kind of diversification – across market segments and countries – that investing in a fund can bring.”

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written by Chris

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