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Property Investing - The REITs VS Purchase Models

Thursday , 08 November 2018 ARTICLES

XT Huaikhwang

Property investments have proven to be one of the most stable methods of obtaining considerable returns on investments. The market has created unprecedented wealth in many emerging economies, riding on developing nations’ high appreciation in prices over the span of the last few years. Thailand is no exception to this phenomenon, with the country’s capital city reaching up to 66% gains over the last 5 years, according to a Nexus survey.  

This marked rise in values has driven many investors to explore alternative forms of property investments in the form of Real Estate Investment Trusts (REITs), where they gain access to investments in income-producing real estate without the commitment of purchasing an entire property. Some common areas that REITS cover are those of the Healthcare, Commercial, Industrial, Hospitality, Retail, and Residential sectors. We take a look at the difference between buying residential REITs and a property outright, providing advantages and disadvantages of both methods of investing:

The REITs model

One major advantage of REITS is that it allows investors to diversify their assets through placing their funds across a range of real estate developments. This essentially means that if the value of one (or a few) of the developments falls, the investment can still provide for positive returns on investments as long as the average performance of all of them remain in the green. Publicly traded REITS also provide the benefit of higher liquidity – it’s easier to sell stocks than a property. Investors also don’t have to worry about maintenance costs associated with owning a physical property – such as monthly fees and the likes. It should be noted, however, that REITs investors are also subjected to pay taxes on their investment income.

Why the direct purchase model will continue to attract investors

On the flipside, one major drawback of REITs over ownership is the host of advantages homeowners enjoy such as earning returns through appreciation in value, rental income as well as using the development to stay in themselves. REITs investors, on the other hand, only own the stock that they purchase – it’s purely an investment vehicle that depends on market conditions during the tenure of investment.

REITs investors are also subject to decisions made by the managers of the trust, not able to make any decisions on what kind of properties are purchased. Although this can favour those who don’t know much about the climate they are investing in, many investors rather rely on their own decisions. REITs also traditionally pay external managers considerable fees (that come out of the revenue) based on the amount of property acquisitions and assets under management. Shareholders may feel that these fees are not justified and can lead to potential conflicts of interest.

普吉島的 Baan Mai Khao

The property purchase model in Thailand

Thailand has been experiencing year-on-year rises in property appreciation over the last decade, with rental yields ranked last year an impressive 4th highest in Asia at 5% to 8%. This is  mainly due to a vibrant tourist trade and governmental initiatives that have strengthened the overall economy considerably. These figures are showing no signs of slowing down, with infrastructural developments laid out for the next several years to improve connectivity and efficiency – factors that will push property values to rise even further. Although the returns on REITs have also hovered around a similar figure, capital appreciation of properties are an added advantage that make them a better proposition to many investors.

Taking into consideration the above, as well as the fact that all Sansiri developments come with freehold terms, it is clear that the accrual of property in Thailand  will always be an asset that can continue to yield profits and be passed down to future generations.

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