Buy paper or physical?

Source:Property Times 18 March 2006 issue
By P. Rajan
If you had the cash, would you rather buying a property for investment or put your money to the fast-growing Real Estate Investment Trust (REIT) market?

PropertyTimes sought the views of industry players on the pros and cons of investing in either of the two options.

“I am more in favour of REITs for the simple reason that they are highly liquid,” said Rosnani, an analyst with a research house.

“Anytime you want to cash out on your investment, you can readily do so. By comparison, properties are illiquid … try getting rid of a condo in a not-so-hot location and you’ll see what I mean.”

Besides liquidity as one of the attractions for investing in REITs, others have cited the attractive yield the instrument offers.

“The bulk of a property’s rental income flows back to the investor,” said an industry observer with ECM Libra. “It is locked-in, and the hassles of running after tenants for rent and other housekeeping issues do not arise.”

For these people, REITs, in a nutshell, offer comparatively decent returns and are easily tradable instruments, without the problems or attendant risks associated with property ownership.

Not so, according to C.S. Yow, a property investor and industry watcher as well.

“The yields one derives from REITs are regarded as passing yields obtained by renting a physical property,” he said.

“However, physical properties offer more. Besides just a yield, which may be on par with that of a REIT, it also has the propensity to appreciate.

“Over the last three decades at least, the internal rate of return (made up of recurring rent plus capital gain) of a property in general has been between 10 per cent and 15 per cent per annum, implying that values can double every seven to 10 years.

“Can a REIT do that?” he asked.

“Capital appreciation for properties,” said Rosnani, “is only in selected areas. This may not be the case in many secondary markets or new townships, where it can get worse as you wait for amenities to be put in place.”

But as Yeow pointed out, physical property is a different animal compared to a REIT and has attributes that cannot be matched easily. For instance, he said “property purchased as an investment can also be used to live in, or passed on to future generations”.

“One cannot stay in a REIT,” he added wryly.

“You should not compare a REIT with physical property investment - it is more accurate to measure it against other investment instruments, such as equities, bonds and unit trusts.”

Others concur with the view that REITs are somewhat between equities and bonds, providing yields of between six per cent and eight per cent while providing upsides for price appreciation.

In a simple survey to determine the ideal composition of a typical middle-income household’s investment portfolio, PropertyTimes discovered that currently, 40 per cent would be put in physical property; 25 per cent in bonds; 15 per cent in equities; 15 per cent as Fixed Deposit; but only five per cent in REITs.

But with avenues opening for investors to put their money in REITs containing foreign property as in the case of the AmGlobal Property Equities Fund, it could be a matter of time before there is a reprioritisation of this order.