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While there have been declines in property prices in recent years, property costs are still high.

However, for those who invest in property, whether they spend a little money or a lot, there are plenty of options available.

Buying a second property for investment seems to be a way of life for people in Singapore. As property portal PropWise commented: “Singapore is a property-crazy nation and Singaporeans are property-obsessed.”

So high is the level of property ownership that it is perhaps the only country in the world that tracks income from “ownership of dwellings” as a component of its gross domestic product (GDP). That income was nearly 5 per cent of GDP last year.

On the surface, buying property looks like a reasonable investment.

GYC Financial Advisory’s deputy chief executive officer Aw Choon Hui reported that the return on property from 1975 to 2017 was about 6.8 per cent. Global Property Guide, a website which caters to residential property investors, said that gross rental yields average 2.5 per cent or more.

Dig a little deeper, though, and the picture is not quite so rosy. Much of the gain in property prices occurred long in the past.

Data from the Urban Redevelopment Authority shows that the private residential property index fell for 15 straight quarters before rising by just 0.5 per cent in the third quarter last year, and an anomalous 5 per cent in February.

That return on property may not include costs such as mortgage interest, stamp duty, insurance, renovation, maintenance, sinking fund fees, property tax and agent fees.

One of the reasons for the price drop is government controls, which have reduced the loan-to-value ratio for borrowers, assessed additional buyer’s stamp duty (ABSD), and increased the holding period. Further rises could be limited if the Government continues to intervene to limit property price increases.

And although the rental return is higher than bank accounts, Global Property Guide concluded that “returns to owners who rent out their properties are low. You wouldn’t own a Singapore condominium for rental yields.”

Mr Showbhik Kalra, head of intermediary and product in Asia Pacific at asset management firm Schroders, also commented that “there is growing evidence that just a physical allocation to real estate is no longer the most efficient use of capital. With a blend of physical and listed real estate, investors could experience improved long-term returns”.

THE ALTERNATIVES

Individuals who want to buy property without getting an HDB flat, a condo or a house do have alternatives, and returns can be attractive.

One option is a real estate investment trust (REIT), which enables investors to pool their money to invest in properties and earn from an increase in the price of the properties the REIT holds as well as from the distribution of rental income.

Investors can buy REITs on the Singapore Exchange (SGX), just like any other stock.

The return on REITs has been good. Investors earned about 10 per cent per year from 2012 through to 2016, including dividends and price increases. In 2017, REITs soared, with the SGX S-REIT 20 index rising about 27 per cent, excluding dividends. While those returns are hard to sustain, they are higher than individual properties or even stocks, which barely budged from 2012 to 2016, and then rose 18 per cent in 2017.

Along with a positive return, REITs can provide a stable stream of income. Investors can sell REIT shares anytime, rather than taking months to sell a property.

Investment advisory The Motley Fool noted that REITs also offer diversification, a low starting cost, liquidity, professional management, transparency and flexibility.

Another alternative for investing in property without buying a flat or a house is to buy property stocks such as CapitaLand or City Developments. Similar to REITs, property stocks usually hold a number of properties and can earn returns from leasing the properties or selling them.

One of the differences is that whereas REITs must pay out at least 90 per cent of their net income as a distribution, managers of the property companies decide how much to pay out. Some property companies also hold assets other than properties.

PROPERTY STOCKS AND SHARES

If you want to invest in property more easily at a lower cost and with potentially high returns, REITs or property stocks may be more preferable than buying your own property as an investment.

If you do decide to purchase a REIT or property company shares, it is easy to do so on the SGX, which has more than 70 real estate firms listed. You can get information about which shares to buy from sources including brokerage firms and investment newsletters.

When you are evaluating companies, take time to understand fundamentals such as the types of properties the company invests in, management quality and historical performance.

Investors should also look at the net asset value so that they avoid paying more than what the property is worth.

Looking out for announcements that indicate the shares may rise, and being aware of upcoming regulations that could reduce prices, are important as well.

Even if you don’t own and control the property yourself, REITs or property shares can give you opportunities to be part of the property market without the hassle of managing the property. And you can often earn a solid investment return, too.

 

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