The best monopoly players are those who prioritise buying properties in order to collect rental in the future. 

In real life investing, be it a family home, an investment property or indirect ownership through a listed real estate fund, housing has a valuable role to play in a diversified portfolio.

Sure, rising interest rates have taken the heat out of the physical property market, and real estate investment trusts (REITs) are facing a double whammy of higher debt costs and lower property values. But as always, times of uncertainty can provide buying opportunities for the right asset.

The question is, how do investors choose between a REIT and property investment?

Determine your investing preference

The first question facing property investors is, how hands-on do you want to be?

Let’s identify different property investing options by the degree of personal involvement and responsibilities.

REITS are companies that own, and in general manage and lease, investment-grade, income-producing real estate. Some of the largest companies are listed on the main global stock exchanges. We shall look at Australia and Singapore for this blog.

As compared to the United States of America, more than 45% of American households own REITs, but for the Asian investors, the appetite is much less. Yet REITs can be a good way for investors to get the diversification benefits of real estate without the commitment and responsibilities of directly owning property.

Top 3 REITs in Australia, the ASX:

  1. Mirvac (MGR)

Mirvac is a developer and manager of residential, retail, office & industrial property.

  1. Dexus (DXS)

Dexus is a diversified Australian REIT, Dexus generates income from charging rent, managing property for clients, funds management, and development and trading.

  1. Charter Hall (CHC)

Narrow moat Charter Hall manages retail and institutional listed and unlisted property investments. 

Top 3 REITs in Singapore, the SGX:

  1. Mapletree Pan Asia Commercial Trust (MPACT)

The REIT has commercial and retail properties that span Singapore, Hong Kong, China, South Korea, and Japan. It posted impressive figures for its 1st half FY2022/2023 period as the merger between Mapletree Commercial Trust and Mapletree North Asia Commercial Trust was completed.

  1. Frasers Centrepoint Trust (FCT)

The REIT is focused on Singapore’s retail scene via its many heartland-located suburban malls.

  1. CapitaLand Ascott Trust (CAPL)

It is one of the leading hospitality trusts in the Asia-Pacific region with 95 properties across 15 countries, worth a total of S$7.6 billion and CapitaLand Ascott Trust has a diversified geographic mix as well.

Why invest directly in real estate?

If having agency over an asset is important to you, then directly purchasing a physical property could be an option.

Investment properties can come with generous tax advantages, such as property depreciation (which can be substantial on newer properties), as well as interest, management and maintenance costs. Net losses can also be offset against an investor’s assessable income, known as negative gearing.

There’s also a wider range of potential outcomes, depending on your property’s type and location, relative to diversified REITs. New infrastructure projects, council rezoning plans or gentrification can add value, just as the closure of a major employment source or natural disasters can reduce it.

Physical property is also less liquid. If you need cash, selling a property can take months and its administrative cost of legal, land office, tax and valuation fees can be costly.

Invest in REIT or property or both?

Depending on your investor profile, you can choose to invest in real estate directly, through a REIT, or both.

  • Investor A: Someone successful and busy professional

If you do not have time to deal with tenants or maintenance, passive investing is likely the right choice as REITs minimize time and effort while “improving risk-adjusted returns in a mixed-asset portfolio.”

For high net worth individuals, you could consider becoming a silent partner to an active investor, which could generate higher returns but comes with substantial risk.

  • Investor B: A somewhat flexible professional

Early careerists or those with flexible jobs may consider making real estate into a part-time job or hobby. Risk appetite, liquidity needs, and willingness to earn sweat equity will inform the appropriate choice.

For those who have already built equity in their family home or other investments, a rental property can also make sense.

  • Investor C: A retired or self-employed person

An investor planning for retirement or without guaranteed income should lean toward real estate for steady income

Although investing in physical property for the purpose of cash flow often means investors need to look to suburbs or out of town locations, which typically offer lower growth and are more susceptible to cyclical shocks – such as certain business sustainability, climate change or the closure of a major employer.

Shifting your investment strategy to REITs might be appropriate if free time is important to you but you desire a steady income. 

Taking an active approach on managing physical properties

From personal experience, taking an active approach to managing property through construction or ‘fix-and-flip’ can be incredibly rewarding and profitable. However,  it is also expensive, hands-on, and highly risky in the current environment.

With prices of building material and construction costs continuing to rise it translates into housing prices, coupled with rising interest rates which increases mortgage cost- it all makes investing in REIT a lot more attractive. 

Having that said, it doesn’t mean there aren’t opportunities in physical properties. Anecdotally, real estate agencies have been reporting fixer-uppers and development sites are taking longer to sell. If you can find a bargain and the numbers work, it could be a good strategy.

If not, passively investing in property and diversifying into REITs may be the best option..

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