When it comes to investments, many Singaporeans’ wishlist includes owning properties that they can lease out for rental income and being able to realise long-term price appreciation.
Healthy improvements in most property segments in Singapore
On the back of the recent collective sales frenzy in Singapore, where nearly 20 residential properties have sold for over $7.28 billion1, many are pointing to an inflection point for private residential properties, which rose 0.7% year-on-year (yoy), after experiencing 15 consecutive quarters of price declines2.
There was also an improvement in the office property segment, with prices increasing 0.4% yoy in the 3rd quarter of 2017 compared to a decline of 1.4% in the previous quarter. This also represented the first uptick in prices since mid-20152.
However, weakness persisted in the retail segment, which declined 0.9% yoy. Nevertheless, this was less steep than the negative 3.2% and 4.0% decline in the 2nd and 1st quarter of 2017 respectively2.
Gaining exposure to the property markets in Singapore
Your home is meant for you and your family to live in rather than an exposure to the property market – this means that you can never realise the full value of its price appreciation, because you’d need another home to live in when you sell it. Neither can your home give you rental returns.
To truly be exposed to the property market, you need to invest in it. In Singapore, there are three common ways where you can invest in properties – direct property investments (other than your home), investing in real estate-related companies on the stock market, and buying unit trusts that are invested in the property market.
1. Direct property investments
Property investments can be lucrative – especially when the real estate market is hot. This is usually because you’re able to take substantial leverage – putting down as little as 20% – to fund your property investments.
However, along with the pros, you need to consider the cons. The minimum 20% downpayment may increase to a much higher amount if you’re deemed to have too much debt under the Total Debt Servicing Ratio (TDSR) and Loan-To-Value (LTV) requirements. If you’re purchasing residential properties, you will also be subjected to more stringent levels of downpayment in addition to having to fork out the Additional Buyer’s Stamp Duty (ABSD).
The government is also prone to making adjustments in the real estate market. They’ve already put through more than eight rounds of property cooling measures since 2009 before scaling back some of the curbs in March 2017. This goes to show that any future plans you may have for your property investments can be easily thrown out the window simply by another unknown tweak in policies.
After finally investing in a property, you’ll have additional worries, such as, whether you are able to rent your unit out, liaising with property agents and paying an agent fee to rent out your unit, buying insurance, paying property taxes and maintenance fees, keeping an eye on interest rates as well as handling many other aspects of being a property owner.
Another way to take on exposure to property ownership is by investing in real estate investment trusts (REITs). You’re able to increase your exposure to the property market without having to consider downpayments, debt, interest rates, real estate policies, taxes, renting out your property or any of the other worries of being a property owner. In addition, you get to enjoy greater liquidity than investing in a physical property.
To get started, all you have to do is to choose a REIT listed on the stock market and invest your money into it. REITs typically pay out good distributions, and you should include this in your research when you’re picking out one to invest in.
REIT managers will handle the worries of managing the properties, and for this, you pay a management fee. Of course, investors don’t often feel the pinch of this fee as they don’t have to pay it – it is just reported as a cost item in the financial statements of the REIT.
REITs tend to own entire building or sections of a building, which allows for efficient management of the properties. Unlike investing into properties on your own, where buying additional properties requires a hefty cash outlay, you’re also immediately diversified into many properties by simply owning one share in the REIT.
Since October 2016, the Singapore exchange (SGX) has also welcomed three REIT exchange traded funds (ETFs) listings, offering investors diverse exposure to multiple REITs as well as several REITs listed in Malaysia, Australia and Hong Kong.
3. Unit Trusts
Unit Trusts share many of the pros and cons of investing in a REIT. One additional benefit of buying into a unit trust is that you’re usually much more diversified, with investments into numerous REITs listed regionally and/or globally as well as other property-related stocks.
One of the drawbacks of investing into REITs is that from time to time, there are corporate actions to raise funds for new property purchases. This is mainly done in two ways: 1) issue new units to external investors and 2) issue new units to existing investors. If a REIT issues new units to external investors, your existing investments will be diluted but you do not have to come up with any cash for the new investments. However, if the REIT offers new units to existing investors (you), you will need to fork out cash in order to purchase them and your existing investments will not be diluted. This can have adverse effects on your financial plan if you do not have sufficient cash at that point in time in order to participate in the fund raise.
Unit trusts tend to always take part in such fund raises, and it usually does so with existing cash resources. This frees you of having to make a decision to take part and/or having to set aside money to take part in such fund raises.
Many unit trusts invest into diverse overseas markets such as Europe, USA and other locations. Some examples on the Aviva Navigator platform include the Janus Henderson Pan European Property Equities Fund, which is primarily exposed to real estate in the United Kingdom, Germany and France, the Neuberger Berman US Real Estate Securities Fund, which invests in diverse property types such as timber and infrastructure REITs, homes, offices and malls in USA, and the United Asia Pacific Real Estate Income Fund, which invests in Japan and Australia.
You should also take note that investors usually have to bear a fund management fee for the convenience they enjoy and active management of the unit trust.
Embarking on a regular savings plan to invest in the property market
One way you can consider starting your property investment journey is to invest a small amount regularly. You can do this via Aviva Navigator’s regular savings plan, where you can invest as little as $200 a month.
Utilising its Fund Finder, you can search investments that are invested into the “property” asset class. From there, you can learn more about the unit trusts, its performance over the years, as well as its investments into REITs or other types of property companies.
 Collective sale fever: Spotlight on decaying home leases – Straits Times, 8 November 2017
 Release of 3rd Quarter 2017 real estate statistics – Urban Redevelopment Authority, 27 October 2017