Should you invest on Real Estate of REIT?

By Randell Tiongson on November 23rd, 2023

Real Estate or REITs: Which is better for you?

The Philippines, with its potential economic recovery and growth and burgeoning real estate market, presents investors with a tantalizing choice: direct real estate investment or Real Estate Investment Trusts (REITs). Both avenues offer unique advantages and challenges, making the decision a nuanced one that depends on individual preferences, risk tolerance, and investment objectives.

Real Estate Investment: The Tangible Appeal

Investing directly in real estate has long been a traditional avenue for wealth creation. The appeal lies in the tangible nature of property ownership, offering investors a physical asset with potential for appreciation and various income streams.

Pros

Tangible Asset Ownership: When you invest in real estate, you own a physical asset. This can be particularly appealing to those who value having a concrete and visible representation of their investments.

Control over Property Management: Direct ownership provides investors with control over property management decisions, allowing for hands-on involvement in rental operations, maintenance, and improvements.

Diversification Opportunities: Real estate portfolios can be diversified across different types of properties (residential, commercial, industrial) and locations, helping mitigate risks associated with specific market fluctuations.

Cons

High Initial Capital Requirement: Direct real estate investment often requires a substantial upfront capital investment, limiting accessibility for some investors.

Management Responsibilities: The hands-on nature of real estate ownership can be time-consuming. Investors must manage tenant relations, property maintenance, and unforeseen challenges.

Liquidity Concerns: Real estate is considered a less liquid asset compared to some other investment vehicles. Selling a property can take time, especially in market downturns.

Real Estate Investment Trusts (REITs): A Digital Spin on Real Estate

In contrast, Real Estate Investment Trusts (REITs) offer a more accessible and liquid way for investors to participate in the real estate market. REITs pool funds from multiple investors to invest in a diversified portfolio of income-generating properties.

Pros

Liquidity and Accessibility: REITs are traded on the stock exchange, providing investors with liquidity that direct real estate investments often lack. This accessibility makes it easier to buy and sell REIT shares.

Professional Management: REITs are managed by professional teams who handle property management, making it a more hands-off investment for those who prefer a passive approach.

Diversification with Lower Capital Outlay: REITs allow investors to diversify across a range of properties with a lower capital outlay than purchasing individual properties. This diversification helps spread risk.

Cons

Limited Control: Investing in REITs means relinquishing direct control over property management decisions. Investors rely on the expertise and decisions of the REIT management team.

Market Volatility: Like stocks, REIT prices can be subject to market volatility. Economic downturns or fluctuations in real estate markets can impact the value of REIT shares.

Dividend Dependency: REITs distribute a significant portion of their income as dividends. Economic downturns or challenges in the real estate market can affect the dividends received by investors.

What should you invest on?

When deciding between direct real estate investment and REITs in the Philippines, investors should consider their financial goals, risk tolerance, and preferences. Those seeking tangible ownership, control, and direct involvement may favor direct real estate. On the other hand, individuals valuing liquidity, professional management, and diversification with a lower capital outlay may find REITs more appealing.

Why not a blended approach?

Ultimately, there is no one-size-fits-all answer. Savvy investors may choose to blend both approaches, leveraging the benefits of direct real estate ownership while also enjoying the liquidity and diversification offered by REITs. Striking the right balance based on individual circumstances and goals can provide a well-rounded investment portfolio that navigates the dynamic landscape of the Philippine real estate market. As always, seeking advice from financial experts and staying informed about market trends is essential to making sound investment decisions.

As always, never invest in something you understand and all investments, regardless of its nature will always carry inherent risks so best to do your homework first.

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Should you invest on Real Estate of REIT?