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Singapore’s Ready-made Income Generators

Perhaps one of the most intriguing questions I have ever been asked about investing is whether Warren Buffett would consider putting money into property.

It was a bit of a head-scratcher, I have to admit.

After all, we tend to associate Buffett with investments in the foods and drinks industry. He also likes companies that make things and commercial enterprises that deliver services such as transportation and insurance.

Property scramble

What’s more Buffett talks at length about the importance of pricing power. In other words, he likes businesses that have the ability to raise prices when they need to.

But property? Really? What could Buffett possibly see in real estate?

Many investors tend to think of the traditional bricks-and-mortar asset as something that appreciates in price. Their argument – and it is not an unreasonable one – is that property prices have tended to rise over time.

They assert that property is a finite resource. It is even more finite in a city such as Singapore, which doesn’t have much land to start off with. So what we have is what we have. Additionally, as the population grows, the scramble for property is only going to become more intense.

They also believe – rightly or wrongly – that many rich people in Singapore today have become wealthy through judicious property investments.

Park it

I have even heard, anecdotally, that some very cash-rich people today – who might be at a loss as to where to park their money – will buy a property simply to leave it vacant and wait for the price to appreciate.

But the Sage of Omaha advises people to think carefully before investing in property. Buffett urges investors to consider what a property is capable of producing, rather than the prospective price change of the asset.

In his view, to focus on price appreciation would be speculation. But focussing on how much income the asset could produce is investing.

That sounds like an open invitation to look at Real Estate Investment Trusts (REITs), which are ready-made income producers.

Show me the money

That is because by their very nature, REITs, which invest in property, are required by law to distribute most of their income to shareholders in the form of dividends.

The distributions are a legal requirement. They are neither a gift from the company nor are they at the discretion of management.

Consequently, REITs can – and have – become seductive investments in a low-yield environment, such the one that we find ourselves trapped in now.

Currently it is not easy to generate income from traditional investments, as hard as we might try. Bond yields are terrible and bank savings rates are just one small step away from being abysmal. But yields on REITs still look attractive, by comparison.

The downside

However, that might not remain the case, if interest rates should rise.

But here’s the thing. If you buy $1,000 worth of REITs that can deliver a steady yield of 5%, then the investment could continue to dispense a regular stream of $50 bills annually, regardless of what might happen to interest rates elsewhere.

The regular cash distributors could include Ascendas REIT (SGX: A17U), Ascott Residence Trust (SGX: A68U) and Suntec REIT (SGX: T82U).

However, remember the sage counselling from Buffett: “A focus on price appreciation would be speculation. But focussing on how much income the asset could produce is investing.”

To lose sight of the simple investing thesis is to misunderstand the rationale behind investing in REITs. Many do, which is crying shame.

A version of this article first appeared in Take Stock Singapore. Click here now  for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock - Singapore tells you exactly what is happening in today's markets, and shows how you can GROW your wealth in the years ahead.

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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 Singapore Director David Kuo doesn’t own shares in any companies mentioned.