For an investment asset class as old as humanity itself, real estate has witnessed countless evolutionary changes. From brick and mortar to glass and steel; low-lying mud huts to giant structures that literally “scrape the skies”, change is imminent. As investors, we should always be prepared for what comes next.
Property ownership has also undergone significant changes as well, with new and complicated ways of investing in property outside of conventionally owning a piece of real estate. Today, we will explore alternative real estate investment options that are accessible to retail investors like you and me.
1. Real Estate Investment Trusts (REITs)
Buying property poses a high barrier of entry for most retail investors, especially for fresh graduates and low-income groups that have difficulty applying and servicing a mortgage loan.
A single piece of real estate will take a huge chunk out of any buyer’s savings, effectively binding the investor financially from other asset classes like stocks and bonds. The inflexibility in choices might dissuade investors from investing in property, as is evident from millennials who would rather rent for life instead.
REITs might be the solution to the conundrum. REITs are companies that own and typically operate multiple real estates, which generates rental income that is distributed back to investors.
Similar to a property’s rental yield and capital appreciation, investors are keen on the REIT’s stock prices, but more importantly, the dividend or distribution yield, which is higher than most fixed deposit accounts on average. As of early 2020, investors can expect a distribution yield of about 5-7% on average.
REITs are also a great way to diversify your risks, as investors are exposed to multiple properties across different locations. Some REITs might even focus on a particular sector, giving investors some degree of control when crafting their investment portfolios.
An example is Al-‘Aqar Healthcare REIT, which primarily invests in hospitals.
What makes REITs so attractive is that they have a significantly lower barrier of entry relative to buying physical real estate. A single share can go as low as RM0.50, and a lot (x100 shares) costs only RM50. This is in stark comparison to real estate that has a starting price in the six figures.
2. Investment Holding Companies (IHC)
Most property investors invest in properties under their own personal capacity. Some married couples may even decide to buy properties individually without joint ownership or loans in order to take advantage of several of Malaysia’s tax laws and lending guidelines.
Investment holding companies (IHCs) are an extension of that concept. IHCs are companies that are set up solely for investment purposes and have the capacity to borrow loans and pay taxes. More importantly, the IHC is considered a separate legal entity from its owner, meaning that shareholders are not liable for the IHC’s debt.
Take the example of Mei Lin, an avid property investor with five properties under her portfolio that were bought using loans. In this scenario, it is difficult for her to obtain future financing because the bank will classify her as a high-risk individual and would probably offer her a loan-to-value ratio of below 50%.
Mei Lin could choose to set up an IHC and refinance her properties to the IHC. This will automatically reduce her risk levels, freeing up her “quota,” and allowing her to obtain better financing options for future property purchases.
However, due to how IHCs are structured, it is not effective at managing a portfolio that primarily consists of residential properties. The upkeep required to maintain an IHC is significant as well; hence, investors are discouraged from establishing an IHC unless they have a sizable property portfolio – in the millions.
3. Syndicates
One spin-off from IHC is the idea of syndicates. It is not uncommon to find property experts or gurus establishing VIP clubs or exclusive premium memberships where only a select few wealthy individuals are able to join.
With the leverage of multiple investors behind their backs, these experts are able to approach the property developers directly to secure better deals that are not available to most public homebuyers. It is not uncommon to find these groups securing an entire residential block, or even entire building projects as a whole.
While syndicates might not necessarily use IHCs to conduct their operations, most of them generally do, considering the liability issues involving millions of ringgit. Note that there is an element of trust when investing via a syndicate because the risk levels are significantly higher. On the plus side, there’s an equally significant payoff.
4. Land
A piece of land is not entirely worthless, even without a building perched on top of it. Similar to physical properties, land prices can range wildly as well. Agricultural land in the city outskirts can have prices as low as RM10 per square feet, but a residential lot within an urban city centre could fetch millions.
Investing in land is slightly different from property. You will most likely eventually sell the land to a property developer or large corporation, which changes the buyer-seller dynamic significantly.
There are many benefits to investing in land, with one of the biggest pull factors being the minimised risk. As mentioned by financial expert KC Lau, even if a bomb exploded on your land and obliterated everything, it is still effectively land. In fact, you might even save contractors a bit of trouble in excavating the ground.
Land also does not require maintenance. While a developer can build and rebuild properties on the same piece of land perpetually, land is a truly limited resource.
The biggest downside, however, is the inability to collect rent on what is effectively barren land, unless you put some work into it. Several property developers have temporarily converted their land into parking lots to collect rental income until they have figured out what to do with it. Some may buy land with the intention of converting it into a parking lot.
Regardless, just because there aren’t any buildings erected on the piece of land, there are still opportunities to profit, both on and underneath the land you own.
5. Physical Property
Physical properties are still the tried and tested way for most investors. According to the Knight Frank Wealth Report, properties make up the second-highest allocation in most ultra-high net worth individuals, right behind equities.
Looking at the Forbes lists all across the globe, you will be hard-pressed to find an investor that has yet to significantly invest in real estate. Many of them have built their entire fortunes on physical real estate alone.
The key advantage of investing in physical properties is control. While many may argue that the property is effectively “owned” by the bank until the mortgage loan is fully served, investors have the sole discretion of what to do with the property however they please – within the boundaries of the law, of course.
Property owners may choose to rent the property to whomever they please, decorate and renovate the property to their liking, or even choose to reside in it as their “forever home.” While the investment risk may fall solely onto a single property, real estate has proven to be stable across different economic cycles and market conditions. Time and time again, real estate has outperformed other investment classes.
Physical property is also the most likely to generate the most returns, with many stories of young investors controlling an empire of real estate through effective rent control, debt control, and smart exits via the selling of property.
All investments, regardless of the asset class, hold different degrees of risks in exchange for various forms and levels of returns. There are no perfect investment asset classes, only the right ones specific to your unique needs.
We would like to clarify that we do not endorse one investment method over another, and readers are advised to conduct their own extensive research before committing to an investment asset class.
Looking to invest in real estate in Malaysia? Ohmyhome specialises in facilitating the selling, buying, renting or tenanting of physical properties.
Through our agent services and property listing platforms, our users are confident that they are able to secure the best deals available on the market. For new property launches, we source deals directly from the property developers, giving customers the best bang for their buck.
Let us join you in your property journey today! Contact +6016-299 1366 or visit Ohmyhome today!
