Today I will be writing about something that is on a lot of our minds in Singapore. Similar to REITs, just that it is something on a personal level and not managed by anyone. It is real estate.
So...... just some fun facts:
1. Almost half of Singaporeans (2.18 million out of 5 million) are in the world's richest 10%, 226,000 (5%) people are in the 1%
2. For the year 2019, the average Singaporean has US$300,000 in their name, with US$150,000 in real estates
3. The median has about US$100,000.
As you can already infer, with our small land-size, if we were to include the house that we are living in into our asset calculations, a lot of Singaporeans would be classified as rich on a global standard. The average price of private property in the city is US$874,372. The average of public housing (3-rooms) is around US$200,000. Hence, it would be correct if I were to say that majority of our wealth is locked up in properties.
But, I would say something that goes against what you believe in. You can only treat something as an asset if it brings you income (by increasing in value and you selling it or by renting it out). Hence, if you are not going to sell/rent the house that you are currently staying in, it is not an asset. That is your personal property.
For subsequent parts of this post, I will be treating real estate/properties as an asset, that means, you are renting it away or planning to sell it. These can be commercial properties (like those shop units that you can rent/sell to shops/offices) or residential properties (those that you rent out to tenants or sell) or industrial properties (warehouses, factories)
So.. What is a real estate?
Investment real estate is real estate that generates income or is otherwise intended for investment purposes rather than as a primary residence. It is common for investors to own multiple pieces of real estate, one of which serves as a primary residence while the others are used to generate rental income and profits through price appreciation. - Investopedia
So essentially:
1. Real Estate is an investment only if you are selling it or to rent it out
2. If you are using it for residential purposes, it is not an investment.
So now that we know what a real estate is, let us take a look at the advantages and disadvantages of it and compare it to REITs as well:
Advantages of owning real estates:
1. Leverage (Purchasing a Real Estate would often mean that you can borrow money from the bank. For example, a property is valued at $1,000,000, you would just need to pay the downpayment of 10% to own it.)
2. Stability (This is especially evident in Singapore. Due to our small size and relatively dense populations, it would be safe to assume that there will always be a demand for housing. Hence, the prices of properties in Singapore have been steadily increasing. Even for public-housings)
3. Cashflow (Imagine just sitting there and receiving rent payment from your tenants. Quick passive income)
4. Diversification (Historically, real estates have shown to be negatively correlated to other financial instruments)
Disadvantages of owning real estates:
1. Taxes and transactions cost (Property taxes, stamp duties, income taxes from rents, ABSD)
2. Liquidity (It takes a while for properties to be liquidated. This is especially significant if you require money in a short span of time.)
3. Tenants and ongoing expenses (People that you rent to may default on their rents due, plus you are responsible for the maintenance cost of the property)
4. Fluctuations in market (Economic conditions would affect the market demands and hence prices of your properties)
5. High entry barrier (You can't buy Real Estate with a $1000 capital, but you can buy other financial instruments with that sum of money)
Now you would question: Wow, Real Estates sounds like REITs. So let's compare the two of them.
Real Estates better than REITs:
1. You make your own decisions on where or what properties to invest (REITs decide on what properties to invest in)
2. Higher leverage compared to REITs (In Singapore, REITs are only able to have a leverage ratio of 50%)
3. Better cashflow (You receive rent every month, rather than the quarterly dividends paid by REITs
4. No management fees (You have to pay for the professional management of the properties)
REITs better than Real Estates:
1. Better liquidity (REITs are traded on stock exchanges, hence, liquidation is within a day)
2. More diversification (REITs normally owns more than one property. This higher number of holdings would mean a better diversification.)
3. Lower barrier to entry (REITs cost lesser than Real Estates to own)
4. Professional management (There are people managing the properties for you)
Criteria to look for in a good real estate:
1. Location (This is important if you wish to rent out your properties)
2. The future prospects of the property area (Are there going to be amenities, malls, business development, that are going to build in that area? If you can foresee that the area has a high demand in the future, it has high appreciation potential)
3. Timing (This is important for properties, as property prices are still tied to economic conditions)
Thoughts and comments:
I believe that Real Estates do play a significant portion in our financial portfolio. Especially in Singapore where we have such a small land supply. However, due to the high barrier of entry and the property taxes, I am unable to afford them in my portfolio at the moment. I believe that as I get old and want a conservative approach to my investments, I would move more portions of my portfolio to real estate.
Personal Portfolio:
$0 in real estates
With that,
I end today's topic.
Stay vested, Stay frugal my friends,
Dionysius
Sources:
https://www.statista.com/statistics/785044/singapore-number-of-millionaires/
https://www.businessinsider.sg/half-of-singapore-is-in-the-worlds-richest-10-and-226000-people-are-among-the-elite-1
https://www.todayonline.com/singapore/singapore-worlds-second-most-expensive-housing-market-cbre-report
https://www.hdb.gov.sg/cs/infoweb/residential/buying-a-flat/resale/resale-statistics#pdurrentresalestatsmedianresalepricesforregisteredresaleapplications13838002997481
https://www.investopedia.com/terms/r/realestate.asp
https://www.investopedia.com/articles/investing/072314/investing-real-estate-versus-reits.asp
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