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REITs vs. Property: Which is the Better Investment?

A common refrain you hear when it comes to buying a property is that “you should buy a property if you’re going to live in it”. I don’t think many of us in Hong Kong would disagree with that but when it comes to investing and building up a passive stream of income, is bricks-and-mortar actually better than the other property alternative – real estate investment trusts (REITs)?

For a number of reasons, I would say no. Here’s why REITs make more sense for those of us who want to invest in property as a means of creating reliable dividend income for the future.

Tax-free income

In Hong Kong, dividends paid out by REITs are completely tax-free. That’s right. You pay 0% on all the income you get from REITs, so if you rake in HK$100,000 in dividends per year you get to keep the whole lot.

But say a property you’ve purchased as an investment gives you the equivalent HK$100,000 in rental income per year, you would be subject to income tax at the normal personal tax rate. In effect, you would be handing over a sizeable chunk of that valuable income stream to Hong Kong’s Inland Revenue Department (IRD).

Falling local yields

Additionally, rental yields in Hong Kong currently are, in my opinion, poor relative to the REIT market. You’re not looking at receiving anything higher than a 2.5-3% yield on a property investment (and remember it’s in fact even lower because of the tax you have to pay plus all those pesky management fees).

Then, we have the local stock market and a large REIT like Link REIT (SEHK: 823), and even that I’m not that impressed with given its dividend yield – offering up a miserly sub-3% even with Hong Kong protests and the now-worsening coronavirus situation.

That’s why, as with all investments, we should be looking beyond our shores when looking to acquire REITs. Just compare the above to the yield a large, reliable Singapore REIT can generate for you. For example, Mapletree Industrial Trust (SGX: ME8U) – a REIT that has over 100 properties in Singapore, the US and Canada – currently gives investors a forward yield of 4.5%.

Not only that but REITs offer you the chance to own a piece of multiple properties, that are professionally managed, without the need for a huge outlay of capital that comes with down payments on property.

Liquidity

One thing that a lot of investors don’t discuss is the liquidity of an investment; essentially how easy it is to buy or sell what you own. A property is far from easy to purchase or sell in a timely manner. You need to draw up contracts, find a surveyor, most likely secure a housing loan and complete the transaction, all of which added together can take months.

As an investment that’s not ideal. If you own a property and want to sell it (if you need cash in a pinch), it will be far from easy. Meanwhile, by purchasing a REIT you own those units within two business days and selling it is the same – you’ll receive your cash in days and not months.

REITs for the long-term income

Overall, if you’re an investor who wants to build up wealth in the long term from property then REITs are the clear answer in the current environment.

The multiple advantages the asset class has over bricks-and-mortar as, and I stress this, an investment means that those of us looking to create reliable income streams from property in the future should look no further than the REIT market.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Tim Phillips owns shares in Mapletree Industrial Trust.