REITs VS Commercial Real Estate In Singapore: Which One Is A Better Investment?

In Singapore, there are two ways to invest in commercial property: buy a commercial property directly, or invest in a real estate investment trust. But which one is for you?

If you’re looking to invest in a commercial property in the Asia-Pacific region, 2022 may be the best time yet.

According to CBRE’s Asia-Pacific Investor Intentions Survey 2022, sentiment towards commercial real estate in the Asia-Pacific region remains positive among investors; 60% of investors intend to make real estate investments in cities like Tokyo, Shanghai, Singapore, Sydney, and Beijing. 

In fact, the positive overall sentiment has led CBRE to forecast an increase in investment turnover by 5 to 10% to around US$150 billion, which will be a historical high for the region.

Findings in the survey also revealed that the logistics and office sectors are the two most popular, with the latter seeing higher leasing enquiries as more offices reopen and companies welcome their employees back.

Investors are also attracted by value-added opportunities to upgrade or redevelop existing properties in good locations to meet future ESG (environmental, social and governance) standards. 

Additionally, investment activities from close-ended real estate funds and real estate investment trusts (REITs) are also expected to recover. CBRE estimates that institutions in the region have up to US$500 billion in equity on their balance sheets awaiting deployment.

So, if you’re looking to invest in a commercial property in Singapore, read on. 

How to invest in a commercial property in Singapore

There are two ways to invest in commercial properties in Singapore: purchasing (office, retail shop, industrial building, etc.), or investing in REITs. 

Of the two, investing in REITs is by far the more affordable option; with REITs, you can invest in a REIT’s portfolio of properties without actually buying the property. Instead, you buy the shares of the REIT on stock markets like the SGX and receive passive income in the form of dividend returns.  

Below are the differences between the two.

Capital outlay and costs

Investing in a commercial property is a huge investment and requires a high start-up cost. What’s more, you’ll also need to maintain the property and pay monthly utility bills. 

The good news is that you can take a commercial property loan from a bank to help finance your investment. 

Most banks can allow you to borrow 80% to 90% of the loan-to-value (LTV) limit, and you will need to pay the remaining 20 to 30% down payment out of your own pocket. Note that you can’t use money from your CPF to finance the down payment or repay a commercial property loan. 

However, banks consider commercial properties to be high risk, and therefore may limit the LTV based on factors such as anticipated use, type of property, and anticipated returns of the property. 

As with residential properties, you’ll also be subject to Total Debt Servicing Ratio (TDSR). For individual buyers, your total debt obligations can’t be more than 55% of your gross monthly income, or banks will restrict the amount you can borrow.

For companies applying for a loan, banks will calculate the TDSR based on the company’s net operating income over the total annual debt. If your company’s financial health is in the red, then banks will take the directors’ annual incomes as part of the evaluation. 

Need help to finance your property investment? Find and compare personal loans now.

In contrast, you don’t need huge capital to invest in REITs and can invest as little as S$100 a month with a brokerage account. You do need to factor in costs such as brokerage fees, commission, and trading fees though, which can eat into your dividend gains. 

Taxes

One of the perks of buying a commercial property in Singapore is that you don’t have to pay Additional Buyer’s Stamp Duty (ABSD) and Seller’s Stamp Duty (SSD).

However, you may need to pay SSD for an industrial property depending on the holding period (the number of years you hold on to the property before selling it). 

According to IRAS, the rates are as below:

While you won’t have to pay ABSD, you will need to pay 7% GST (which will be raised to 9% by 2024), 10% property tax, and Buyer’s Stamp Duty (BSD) when buying a commercial property.  

On the other hand, one benefit of investing in REITs is that the dividends from REITs are tax-exempted. However, this only applies to REITs listed on the SGX as foreign REITs may be subject to capital gains tax.  

Yields

On average, commercial properties have a rental yield of 5%, which is higher than 2 to 3% for residential properties. However, remember that commercial properties have higher maintenance costs and utility bills in general. 

For REITs, the yield is 5 to 6% on average. Not only do they offer higher returns, but they also require far less capital to invest.

Liquidity

REITs are traded like stocks and are therefore highly liquid: you can sell them quickly if you need the money. 

In contrast, it could take months to sell a commercial property. While you can sell a commercial property quickly, doing so usually means that you have to sell it below market prices to a willing buyer. What’s more, you may incur SSD if you sell an industrial property during the holding period.

Cash flow

Properties tend to appreciate and increase in value over time. This means you can sell it at a higher price in the future, or increase the rental if amenities around the property become more developed. 

REITs, on the other hand, are traded on the stock market, making them more volatile and prone to fluctuations. 

Flexibility

You have more freedom when you invest directly in a commercial property. For example, you can pick the type of commercial property to invest in, the location, or decide on the rental price. 

With REITs, you’re investing in a portfolio of properties set by the REIT and therefore have limited say in what to invest.

Diversification

When you invest in a REIT, you’re investing in the REIT’s portfolio of properties. This means that you’re essentially diversifying your investment. Additionally, you can invest in more than one REIT, allowing you to diversify your investments further. 

That said, while REITs help to diversify your investment portfolio, some are focused on one particular industry such as hospitality or retail.

If the industry isn’t doing well during a recession, or if travel restrictions kick in, these sectors will be the hardest hit and will impact your investments directly.  

In comparison, investing in commercial properties is much more expensive, making it harder to diversify and invest in multiple commercial properties. 

Conclusion

Investing in commercial properties offers many advantages including good investment returns, exemption from taxes such as ABSD, and a higher LTV limit compared to residential properties. 

However, commercial properties come with higher maintenance costs and capital outlay. While you don’t have to pay ABSD and SSD, you do need to pay GST and property tax, which will eat into your rental yields and add up to your costs.

On the other hand, REITs offer a more affordable way to gain exposure to the commercial property market as you don’t have to sink a huge amount of capital to buy a property. What’s more, REITs offer better diversification, higher liquidity, and exemption from taxes, and dividend returns are also tax-free. 

On the flip side, REITs are exposed to property-specific risks. For example, during a pandemic where people stop travelling, demand for travel will drop and will directly impact the hospitality sector, which will also impact you if you have investments in hospitality REITs. 

Ultimately, before investing, remember to research the property and company and understand your risk appetite. 

Read these next:
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6 Alternative Investments To Diversify Your Portfolio