Saturday, January 10, 2015

$1 Million in Property or REITs?

I read a post by Mr 15HWW about his hypothetical scenario of Stocks VS Properties, and I thought I'd do a somewhat similar post, but zooming in on the "Property" aspect portion.

Q: If I had $1 million and I wanted to invest in "Properties", which is the objectively better financial investment?
Edit: Assumptions are that loans and leveraged will not be used. This is a one-time lump-sum investment, and most important factor is the long return expected total returns.

It's definitely not easy to find out this answer, but let me try anyway.

Data Series Sources:

For REITs, I am using the FTSE REIT Index on Marketwatch going back to the start of 2003 until now. I am also using the data from REITDATA.com.

For properties, I will use the SRX Index, Condo, All Sales. Even though the data goes back to 1995, I will just start from 2003 for a better comparisom.

Let's Go!

Since the start of 2003 until November 2014, we have had roughly 12 years, short by just 1 month.

The FTSE REIT Index started at 324.22 and ended at 774.58. Total gains is 138.9%, while annualized gains is 7.5%. The SRX Index started at 70.9 and ended at 169.1. Total gains is 138.5%, while annualized gains is 7.5%. Very similar results! Capital gains is pretty much the same.

Singapore residential property yields 3.6% GROSS on average. The range is between 2.6% to 5.5% based on data from Squarefoot, which includes all data in the past 6 months excluding projects with less than 3 transactions.

REITs yield an average of 6.5% NETT. The range is between 4.7% to 8.3%. This data is based on the current month figures from REITDATA.com.

Other Considerations

Non-owner occupied residential property have a property tax rate of 10%, while their incoming rental is taxed with your income. I think a very very conservative method (maximising yield with low expenses and minimum maintenance fees and taxes), we can discount gross yield by 10% to get the net yield.

Dividends distributed from REITs are not taxable, and their structure gives them preferential tax treatment as well.

REITs allow for faster liquidation, liquidation by parts and diversification. Equal weighting the REITs listed on REITDATA.com will result in about $29,000 in each of the 34 REIT counters which spans over hundreds of properties in hundreds of locations.

Conclusion

With $1 million dollars, a residential real estate investor would hypothetically have an annual net income of $33,000 (probably much lower in reality), while a REIT investor can expect $65,000 of net annual income. Residential real estate investors are also exposed to the maximum amount of unsystematic risk by having zero diversification and have a very tedious and inflexible liquidation process. This is also on top of the additional time and effort spent on managing and maintaining your property and tenant.

This is probably not the answer many Singaporeans want to hear. Objectively speaking, residential property investing is many many times more inferior than investing in REITs. Both investors can expect to have similar rates of capital gains, but REITs yield 3% more than residential real estate, which can add up substantially over the years.

This focuses only on the objective and tangible aspects of both investments. Investing in a residential real estate can give you access to the facilities and community, and also provide a flexbile additional housing option for yourself. These are not tangible and different people value them differently.

Anyway, this is just a quick and dirty study pulling out numbers and facts from all over the place. I don't mean to recommend REITs over real estate as an investment to others. Other people may have different considerations and factors driving their investment decision which I did not factor in. Personally, I rather everyone else except me plow into the housing market and avoid REITs, leaving me invested in undervalued counters with higher yields. But as long as most people think the stock market is a casino that goes up sometimes and goes down sometimes, I doubt the same fervent property hunters are going to play the same game with stock investors.

I would invest in REITs over residential property given the choice. Swimming in my investment property's condo pool? I rather jump into the ocean from my yacht, purchased with all the extra money I'd make going with REITs. Oh yeah.

19 comments:

  1. Hi GMGH,

    I'm in a midst of deciding (in the Stocks column) between growth stock or REITS. Could you make one comparison as well please? hahaha

    jfree

    ReplyDelete
    Replies
    1. Hi jfree,

      Unfortunately I don't have any benchmarks for growth stocks, since it's not a constant. Stocks can be growth initially and moderate over time to be more stable counters which are not typically considered growth anymore.

      Personally, I think diversifying with both growth stocks and REITs can play a part in a portfolio. There's no need to be all-in or nothing. A portfolio can be skewed to one preference, or even equal weight if you are not sure!

      Delete
  2. another difference. one can use leverage to borrow and invest in property, while reits usually not. also, property does not have daily ready price for sale. one usually hold it longer, while reits price fluctuates, which can cause mental distress... hard to imagine one can hold its reits as firm as holding its property...

    ReplyDelete
    Replies
    1. Hi Richard,

      You are absolutely right, with a 2nd property we can leverage up 2:1. It is possible to invest in stocks on margin as well, but it is less common.

      Perhaps it is my fault that I did not state my assumptions, but I was assuming that this is for someone with a $1 million lump sum and deciding between an investment in a property or REITs. I excluded downpayment and leverage to keep it a simple apples-to-apples comparison.

      (Ironically, high-end and expensive luxury homes actually tend to have much much lower yields, clustering under 3% gross.)

      REITs probably do have lower risk-adjusted returns, since they are much more volatile. I would say, practice willful ignorance about market prices, but it is definitely easier said than done. That is probably why REITs give a higher total return, even though they have worse risk-adjusted returns.

      Delete
  3. Hi GMGH,

    I actually thought a fairer comparison would be to use the $1 million to purchase

    a) Two $1 million properties
    b) $1 million in REITs

    The leverage would then be more in line and the results closer?

    ReplyDelete
    Replies
    1. Hi Mr 15HWW,

      Aye, the leverage between my 2 options are way off. A $1 mil prop has zero leverage, while $1 mil is REITs will probably have about 40% of debt already baked in it.

      However, I am assuming it's a one-time lump sum investment, something that doesn't require additional cash injections. Something that maybe a 55 year old planning for retirement might want to consider. Both will appear as $1 mil assets in my portfolio and will require a $1 mil capital outlay. So while "leverage" is different, I'm trying to compare bang-for-your-buck.

      Although it seems like the debt of REITs is the cause of outperformance compared to residential real estate, I have read that it is actually very inconclusive that higher leveraged REITs have better long term performances.

      On another note, I think if I compared the US residential real estate VS. US REITs, the US REITs will win by a very large margin! Singapore has land scarcity factors that help prop up our residential prices. I was quite surprised by the marginal outperformance of REITs to residential real estate in Singapore. Few other real estate markets around the world has had such good rates of returns. I imagine just maybe HK, London and NY!

      Delete
    2. Hi GMGH,

      With REITs, there is a chance of a rights issue?

      So I still feel property needs to be leveraged for a better comparison with REITs.

      But just my opinion though. =p

      Delete
  4. Many thanks with regard to discussing since it is a superb publish so want to study your own long term publish.
    We additionally reveal some thing.

    Jurong MCL Condo
    is also near to Chinese Garden, Japanese Garden and many shopping centres and entertainment outlet’s at Jurong East such as Superbowl Jurong and Snowcity.

    Jurong MCL Condo

    ReplyDelete
  5. In reality splendid occupation with the blog. I do in the vein of your rigid effort and will linger for more post from you as post gave me joy and gives some helps to do same work right here. Thanks a lot…………………………kids writing

    ReplyDelete
  6. First of all thanks for the post. Really it is awesome post. I do like your hard workings and appreciate your concept. I can refer you another site where one can get huge assistances concerning education. To learn moirĂ©, please click here. Thanks……Videographer Melbourne

    ReplyDelete
  7. This is the original point in time I visited this blog. Really this is breathtaking effort with the blog. It is exceedingly contentment to search out it as I got mammoth helps right here. I decidedly welcome the bloggers workings and will kill time for more post from the supervision. writing camp

    ReplyDelete
  8. Really rich content and very useful information. I found my problem’s solution starting over here. I exceedingly advocate his/her machinery by means of the valuable enlightening information. Thanks a lot………..good kitchen colors

    ReplyDelete
  9. Gets an insight of home shelving ideas from the expert and user reviews before you decided to buy one from your trusted store shelving.mavencreation.com

    ReplyDelete
  10. Great! Wonderful! Actually wealthy content and extremely helpful in sequence. I got it my answer from over here. I extremely advocate his/her mechanism with the helpful educational information. Thanks a lot………..Costa del Sol Property

    ReplyDelete
  11. We provide our Clients with the comfort they need by maintaining a track record of dependability and quality work! Working with Simplified Roofing will save you money AND provide your home with a high quality roof.
    Emergency Roofing Cypress

    ReplyDelete

Observe the house rules.