Pitching REITs against Direct Property Investments

In The Edge Investment Forum May 2013, Dato’ Stewart LaBrooy, CEO of Axis-REIT Managers Berhad had this in his presentation slides: 

I have a lady friend who works as sales executive for an established property developer. The funny thing is that when she goes to see a doctor, the doctor will ask her for property investment recommenda- tions and then slip her his card before she leaves the consultation room. The same thing happens a lot to her colleagues as well.

It is true that owning real estate is one of the fastest ways to make lots of money. A lot of people I meet who have bought properties in Penang, especially on DIBS, committed to owning a “piece of the action” without understanding the underlying tenant demand. They are just banking on one thing – the seemingly never- ending rise in prices for future “flipping”. However, this is only likely to be applicable if you stay in KL, Penang or Iskandar Malaysia. I know of people in Melaka, Kulim or Sungai Petani who are frustrated with the stagnating property prices in the areas where they stay. Their only options is, (when they don’t know about REITs) to get a piece of property in some of the “property hotspots” above. That means extra time, effort and the hassle of travel- ling outstation to look after and manage their properties. Is it worth it? Or would that diminish the initial excitement and benefits of owning a property while we wait for the property to rise in price to the point we cannot resist to cash out?

For the majority of working class people, how many properties can you actually buy without over committing yourself? I know of a couple in their early 30’s working in multinational companies with a combined monthly net income of less than RM10,000 but are paying heftily for loans taken from their RM400k (for own stay) and RM800k (for investment) properties. In comparison, start-up costs for REITs investments are significantly lower. Life is not just about paying repayments, is it? Of course their objective is to get to the point where they could profit big and retire early – never mind the temporary tight cash flow. But should they have known about how REITs work, there is definitely lesser risk to invest in properties without overleveraging unnecessarily. Think of the risk of retrenchment (which is pretty common in today’s short market    cycle) – and then look at our capabil- ity to service the loans should we be jobless for the next 6 months. We can’t imitate what other people are doing just because we can. A good example would be we cannot compare ourselves with doctors in private practice whose businesses are unaffected by market conditions.

Property ownership, after all, is a nest. It is a shelter for our family, a retirement home when we are old. That explains the first choice for many property investment is residen- tial properties, which tends to be closer to the hearts of the ordinary man-in-the-street.

For REIT, there is no physical association for the owner except for the monetary benefits.

Physical property ownership definitely enables flaunting. What have you got to flaunt if you are holding REIT stocks? Your total portfolio value in your CDS account? Not very exciting – they are just numbers. However, a prime property is often symbolic of prestige – whether he is cash rich or cash poor after buying his property, remains a private matter. The address of your property will speak for itself and add value to your self-worth. That’s why the house warming practice exists.

It is clear that the very constraints of property investments are conversely the advantages of REIT investment. So which one would you choose? That depends a lot on your objective. Define (what goal?) & quantify (how much) what we are really looking for. Also, understand how prepared we are to meet life’s contingencies and setbacks in our investment, then, I believe the answer will surface by itself.