It’s a well-known fact that Singaporeans love property. Before the pandemic, it was common to hear of hordes of people thronging condominium showrooms where units are snapped up like hotcakes.
While the pandemic has eliminated these throngs, the property market continues to remain buoyant. Last month, 99.co and SRX reported that condominium resale prices climbed for the 15th consecutive month, hitting a new all-time high.
The rental markets for HDB flats and private property also benefitted from Singapore’s economic recovery, with condominium rents climbing by 9.1% year on year in October. But it’s not all good news for investors.
Physical property requires heavy upfront capital and constant upkeep. Property-related stocks, on the other hand, offer an alternative, acting as a proxy for owning physical capital and can easily be accessed through the stock market.
REITs and property stocks are breathing a sigh of relief as economic activity picks up. As an investor, you may wish to take a second look at property-related stocks as they offer some compelling characteristics. Here are five reasons why they are attractive.
1. A scarce resource
No matter how you cut it, land is a scarce resource in our tiny island. That’s the reason why the government has been trying to maximise the space by building higher and increasing the plot ratio for properties. Property developers such as CapitaLand Investment (SGX: 9CI) and City Developments Limited (SGX: C09) that own land banks have a valuable asset on their balance sheets.
And REITs such as Frasers Centrepoint Trust (SGX: J69U) and Mapletree Commercial Trust (SGX: N2IU), which owns a portfolio of heartland retail malls and retail cum commercial properties in Singapore, respectively, are sitting on a veritable gold mine. By buying into such companies and REITs, investors can indirectly own a piece of valuable real estate.
2. Tax exemptions
Companies naturally are obliged to pay corporate taxes to the taxman at the current rate of 17% on their chargeable income. REITs, however, have a distinct advantage in this area. As long as they pay out at least 90% of their earnings as distributions, REITs are exempted from paying income taxes.
In addition, investors also do not need to pay income taxes on dividends received from both REITs and property developers. So, REIT investors win on two fronts as their distributions are completely exempted from income tax. Contrast this with owning an investment property where the property tax rate stands at 10% of the annual value of the property.
3. Easy to transact
Selling physical real estate can be a tedious process. You will need to engage a property agent and lawyer, and get in touch with the banker who offered you the mortgage. Not to mention the property is also an illiquid asset that may take weeks or even months to dispose of.
In contrast, property stocks and REITs offer much less hassle. As they are listed on a stock exchange, you can easily transact through the platform. The market is also fairly liquid and you can obtain your cash much more quickly should you sell. All you need is a stockbroker to facilitate the transaction.
4. Piecemeal holdings
When you’re dealing with physical property, you can’t sell it off piece by piece. It’s impossible to just, for example, sell off the dining room while retaining the rest of the property. For property-related stocks, though, you can choose to sell all or part of your shareholders.
This ability to transact in piecemeal fashion provides you, the investor, with much more flexibility.
5. An external manager
Owning an investment property comes with a set of responsibilities including maintenance and tenant management. You have to periodically check in on the property to ensure it is in good condition and also liaise with your tenant on rent collections. If the unit is vacant, you have to expend the effort to locate a suitable replacement tenant or else your cash flow dries up.
On the other hand, REITs appoint a manager that takes care of all the above, and the portfolio will be professionally managed by a competent team of staff.
The REIT manager’s duty is to ensure the properties are occupied and well-maintained, and that all tenants pay up on time. You can thus outsource the management of the properties to a competent manager who has your best interests at heart. Stay tuned for another five reasons as to why we believe property stocks are a great asset class to own!
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By: Royston Yang
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