What is diversification and should you pursue this strategy within your property investment portfolio?
You’ve probably heard of the phrase “don’t put all your eggs in one basket”. In the context of investing, this means you should not put all your investment dollars into one type of investment otherwise you’ll be heavily exposed to risks should that investment turn sour.
Many investors pursue a diversification strategy whereby they spread their investment dollars around across a variety of asset classes. Even within a particular asset class, there are options for further diversification.
Diversification reduces the overall volatility of your investment portfolio and minimises the risk of losses over the long term. For example, if one asset class is not doing well, the others can make up for it. This yields better “risk-adjusted returns” in the long run. Real estate has a lower correlation with the stock or bond market. Therefore, as an asset class, it offers a diversification opportunity in a multi-asset portfolio.
Ways to diversify within a real estate portfolio
Within property itself, there are a number of ways to diversify your investments.
In Singapore, if you are looking to purchase a residential property for investment, this will likely be in the private property space. Private housing includes non-landed property such as condos and apartments, and landed-housing. Within private property, there are freehold properties, which tend to be more expensive, and leasehold properties which usually come in 99-year terms.
If you’re purchasing private property to rent out for passive income, consider the renter profile you are targeting. It may not make sense to buy a bungalow as very few families can afford such expensive rentals. So, if you’re looking to rent your unit out to, say an expat family, a 3-bedder condo in a convenient location may be more suitable.
Within residential property, there are also various regions to consider. There’s the more expensive prime real estate in the Core Central Region (CCR) in Districts 9, 10 and 11, (local or overseas), the city fringes in the areas known as Rest of Central Region (RCR) and the more affordable Outside of Central Region (OCR).
Commercial property includes office building, shopping malls, market and food centres, restaurants and some mixed developments. There is no ABSD on commercial property and rental yields tend to be higher compared to residential property. You can’t use CPF to finance the purchase either.
As commercial property is for business-related purposes, its fortunes are more closely linked to the state of the economy. With the new trend of working from home, there may be more office vacancies. Along with the rise of e-commerce and the impact from COVID-19, tenants for retail spaces may be increasingly difficult to find. You’ll have to do your sums and research carefully before entering this space.
Industrial property investment in Singapore can be divided into B1 or B2 properties. B1 industrial properties are for light activities while B2 industrial properties are for heavy activities such as manufacturing. Similar to commercial properties, there is no ABSD levied on industrial property and CPF also cannot be used for the purchase. Industrial property usually come with shorter leases of between 30 to 60 years.
Other alternatives: Co-living properties
Co-living is a modern form of rental housing. If you’re investing in co-living properties, you’re actually running it like a business. This new form of living brings together individual tenants who rent a room and live under one roof, sharing amenities such as the kitchenette and dining areas. More and more millennials are embracing the co-living concept. If you intend to invest in the co-living space, you can consider buying a condo unit to rent out to individual tenants as co-living property.