Investing in properties is a favorite pastime for Singaporeans because they have been rewarded well over the years in the past.
People are also attracted to property investing because they are able to leverage on their limited capital to buy something which is tangible and much “easier” to manage than dealing with equities. That is until the cooling measures kick in which hits the property market hard in recent years.
Since then, investors have preferred to deal with the option of equities in gaining traction to properties through investing in developers or Reits since it is much more affordable for the retail investors. But are investing in Reits and developers the same?
Reits have been a popular investment vehicle since they were introduced as they have a business model that is relatively straightforward and catches the attention of investors who rely on passive income.
They are a clustered group of properties structured under an investment trust and is open for the retail investor to gain ownership through equities.
When investing in Reits, there are certain important factors which an investors have to think about which I have blogged previously (here). The idea is through the master or individual leases, the company receives rental income which is then distributed out to shareholders in the form of dividends after deducting administrative charges.
If you are someone who like to purchase properties and rent out the premise for rental income, then the business model would appeal to you.
Developers are a different beast altogether when we compare them to Reits and their business model are run differently.
The goal of a property developer is to source for cheap land, redevelop them into new projects and sell to prospective buyers. Their income tends to be lumpy in nature since property projects may take years to complete and selling them may again take time to happen. Even as the management tries to ladder time the completion of the projects, demand are usually much dependent on the economy and property cycle.
Developers are not known to be a high dividend payer as they require the cash flow retained to tender or source for the next land bank to replenish their inventory. Take CDL for instance. They are able to pay dividends as high as Reits if they decide to pay out all their earnings but because they have to retain the majority of the earnings, their yield is low.
There are several good thing however about investing in developers. First, they are usually big market cap companies who has the power to tender for projects at cheap financing before redeveloping them and passing the costs to the buyer. Even as demand slows down, most developers are strong enough to hold inventory in their balance sheet and only chose to release or develop them in a rising market.
Also, many developers are now moving their strategies towards investing in commercial properties to boost their recurring income so that their earnings will not be as lumpy. I think the way they are set up are almost similar to Reits now, with a much greater flexibility to transition in their business model.
Both are good investment options depending on what you are looking for in your investment.
With interest rates looming and cooling measures still in place, I think a lot of the negativity has much been priced in. Buying low selling high? Perhaps it's a good time to practice that.