Many Singaporeans love investing in real property. There are many seniors who own apartments with the idea of collecting rent when they retire. However, direct investment in real property requires a pile of cash and lacks liquidity if you need to cash out in a hurry. REITs may be a better option.
What are REITs? REITs, or Real Estate Investment Trusts, work like mutual funds or unit trusts that uses investor’s money to buy and operate properties typically to generate rental income. There are over 30+ REITs listed publicly that you can buy in Singapore Exchange. When you invest in REITs, you are essentially a shareholder in a portfolio of properties owned by the REIT – which can include both local and overseas properties. REITs are attractive to any retirement investment because the law requires REITs in Singapore to payout 90% of its income as dividends – unlike normal companies whose dividend payout are entirely at the discretion of the Board. REITs are technically classified as equities but in terms on investment, they work more like a hybrid with some characteristics of a traditional bond.
Why REITs are good for retirement?
- The most attractive aspect of REITs is the dividends — which translates to passive income. Yields in Singapore REITs typically range from 5-8% and are paid out quarterly or semi-annually. Feels like a fixed-deposit but with much higher yields.
- While REITs are not immune to the economic ups-and-downs, it is typically less volatile than stocks and bonds because the rental income tends to be more shielded in the short run from adverse market news.
- REITs also has the added feature as an inflation protector — the same as property investments. If you are worried about inflation eating away at your investment, REITs will offer some relief.
- REITs should be a part of your portfolio together with stocks and bonds to help diversify your risk. Even within REITs , you can further diversify into different REITs that focus on office, retail, industrial and healthcare. Each sector reacts differently to changes in our economy.
There must be a catch, you ask! Yes, there are risks that you should be aware of.
- REITs borrow to buy real property and is susceptible in an environment of rising interest rates. While no one can predict fully what affects interest rates in Singapore, a major factor is the US Federal Reserve. When interest rates goes up, REIT dividends tend to go in the opposite direction – and along with that, the unit price. Many investors believe we are in a period of likely rising interest rates.
- Globally, REITs as an investment class may underperform stocks at times. During periods when stocks prices are rising rapidly, REITs may not trend the same way and you may lose out on profiting from the stock boom.
- Prices in real estate will have a major impact on REITs as it is entirely based on one class of assets. Property prices in Singapore has been generally doing well but it is not without its ups-and-downs in the past. In that sense, investing in REITs alone does not offer the risk diversification advisable for your retirement portfolio.
Disclaimer: BetterLiving65 is neither an investment adviser nor investment company. The article is intended solely for educational and discussion purpose. All investments carry risks of losses and you should always consult your investment adviser before making any investment decisions.