Among other things, Singaporeans have also been savvy about investing in property. Real Estate Investment Trusts (REITs) seem to have more takers in the financial world. More so because of the sudden rise in prices of properties in Singapore after a long slump. As per an article published in the Dollar and Sense, the property market has been declining for 15 straight quarters.
REITs do not require you to invest huge amounts as would be the case in property investments. Plus, they are mostly liquid investments. So, even if you wake up one morning to find that your stocks are not doing well, then you have the option of selling them immediately on a stock exchange. This won’t be possible in case of property investments as unloading of assets and property sale takes time. You might even require property agents to sell your space.
It is because of these benefits that investors in Singapore are turning towards REITs for smart investments. But before you run after the carrots of investing in REITs, it is important that you get a detailed understanding of how REITs work. Our article is focused on educating newbie investors on the ins and outs of REIT investing. Read on to understand how to invest in REITs.
What are REITs
Investopedia defines a REIT as a company that owns, operates or finances income-producing real estate. For a company to qualify as a REIT, it must meet certain regulatory guidelines. REITs often trade on major exchanges like other securities and provide investors with a liquid stake in real estate.
Basically, REITs give you the opportunity to invest in the property market but in smaller units. The end result is that you are able to collect and enjoy the passive income. REITs collect funds from investors and invest these funds in commercial properties. They then collect rent from these properties and distribute it to the investors after deducting the fund management fee.
These REITs are listed on the stock exchange. In Singapore, there are nearly 40 REITs listed on the Singapore Exchange.
Types of REITs
There are mainly 7 types of REITs. As investors, you can choose the segment of the property you want to invest in. Let’s discuss each of them:
- Commercial REITs: these are mostly office buildings. Some examples of this type of REIT are CapitalLand Commercial Trust, Fraser Commercial Trust, and Cromwell European REIT.
- Industrial REITs: They usually own warehouses, manufacturing units, and other buildings that are used for industrial purposes. Mapletree Industrial Trust and Cache logistics trust are examples of industrial REITs.
- Healthcare REITs: As the name suggests, they mostly comprise of hospitals and nursing homes. ParkwayLife REIT and First REIT are examples.
- Hospitality REITs: These are mostly hotels, boutique hotels, and serviced residences. Ascott Residence Trust and CDL hospitality trust are common examples of this type of trust.
- Retail REITs: This type of REIT mostly comprises of shopping malls and shop houses. CapitalLand Commercial Trust, and Fraser Centrepoint Trust are examples.
- Residential REITs: Residential REITs are the least common in the Singapore market. These REITs own apartment buildings and other homes.
● REITs are traded on the stock exchange
Although we have mentioned this earlier, we would like to go over this again. Just like stocks, investors trade in REITs through the stock exchange. And trading on the stock exchange gives rise to volatility. Sometimes when the general market is not doing well, it tends to affect the prices of REITs as well. This can happen even when the property market is not majorly affected. Another thing to note is that not all REITs are traded in the stock market.
● Diversification matters
One major reason why people opt to invest in REITs is that it offers diversification to their financial portfolio. We earlier discussed the pitfalls of investing in properties. Based on that, it only makes sense to opt for REITs as opposed to direct property investments. Instead of owning a property of your own, your REITs would often own multiple buildings with tenants from various businesses in Singapore.
● You get stable tax-free income
If we talk about the risk element of investing in REITs, it is interesting to note that REITs on a local exchange offer high yields and are considered to be safe as they represent tangible buildings in Singapore. As per another article from Dollar and Sense, REITs in Singapore averaged a return of about 6% yield annually.
And the best part about receiving dividends in Singapore is that it is tax-free. This is obviously not the case when you own an actual property. Owning a property means you have to pay up all the required taxes to the government (property tax and income tax for properties).
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