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Love REITs? Here are 3 reasons why a REIT fund might suit you more

14 February 2020
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For many Singaporean investors, an alternative to buying a second or third property for investment is to invest in a real estate investment trust (commonly known as REITs) as it provides individual investors with multiple benefits including diversification – compared to owning a single property, the ease of buying and selling units since REITs are listed on the stock exchange, and the affordability to access an otherwise inaccessible large asset such as an office building or shopping mall in bite–sized chunks.

So, what exactly is a REIT?

REITs are essentially a diversified portfolio of income generating real estate assets such as shopping malls, offices, hotels or serviced apartments. These properties are professionally managed, and the rental income generated are usually distributed as dividends to the REIT holder. In addition, REITs must pay out at least 90% of its taxable income each year to enjoy tax–exemption by IRAS1

In the last two decades, Singapore has evolved from being a predominately local REIT market to a global REIT listing hub with a diverse profile of international sponsors with property portfolios spanning across Asia Pacific, North America and Europe. In addition, the S–REIT scene is also diversified by property sub–segments with a wide mix of commercial, industrial, office, retail, hospitality, healthcare and specialized REITs with a combined total of more than 40 S–REITs listed on the Singapore stock exchange.2

With so many REITs to choose from, how should you as an investor, construct your REIT portfolio?

Also, do you have what it takes to be a savvy REIT investor?

Do you know the difference between DPU Accretive vs Yield Accretive?

What about WALE? Or TERP?

Well if all these terminologies sound alien to you or perhaps even bore you, then you might be better off investing in a REIT fund rather than choosing a REIT yourself.

Why invest in REIT Funds?

A REIT fund is basically a unit trust that specializes in owning REITs rather than traditional stocks or bonds. Like most unit trusts, one of the main reasons for investing in a REIT fund is because they are being professionally managed by a team of portfolio managers and analysts who knows the ins and outs of the real estate market.

Here we highlight 3 reasons why a REIT fund might be better than directly owning a REIT:

1. Diversification & sub–sector allocation

Perhaps you have decided that you want some REIT exposure in your investment portfolio. The more difficult follow–on questions are then: What REIT should you buy? What is the dividend yield that you expect? Is a high dividend yield necessarily better? What are the underlying properties that the REIT holds? How many REITs do you want to be holding? Are you able to monitor these individual holdings on a regular basis?

Given that there are so many REITs just in Singapore to choose from ranging from commercial, industrial, office, retail, hospitality, healthcare and specialized REITs, these are not easy questions to answer unless you have the time and expertise to analyse them.

Also, markets move in cycles and the macro economic conditions may change drastically from time to time, which in turn may affect the demand of certain property types. For example, if there is a strong pipeline of industrial warehouse space but the economy is going through a slowdown, there may be an increase in vacancy rates or a fall in rental yields of industrial REITs. Similarly, if E–commerce becomes a more popular way for people to shop, less people will shop at retail malls and it may not make sense for retailers to pay high rentals at shopping centres, leading to a drop in rental rates for REITs in the retail mall space.

In addition, if the overall economy in Singapore does not do well, you may be exposed to country risk and it may make sense for you to tap into potentially higher yielding REITs in resilient or growing markets abroad as a form of diversification. However, the regulations and business dynamics may be quite different overseas and you cannot use the same evaluation metric to analyse the investment.

Hence, a REIT fund managed by a professional manager may be a better alternative as they are able to provide diversification benefits by investing in other regions such as US, Canada, Japan & Australia while choosing the right sub–sector to allocate investments to, depending on the macroeconomic conditions.

2. Market Timing & Tactical Strategy

Another hurdle after you have chosen the right REIT to invest into is to decide the timing on when you should invest. It may be a good REIT but it may be overpriced at current valuations, and paying a high price for an investment means a lower potential return or a lower dividend yield.

Professional fund managers tend to do better than retail investors in market timing and tactical trading to capitalize on market inefficiencies. They do so by spotting undervalued REITs to invest in and selling overvalued REITs to lock in profits.

3. Corporate Actions (Rights Issue, M&A)

One unique characteristic of REITs is that it is common to see REITs issue rights or conduct private placements to raise more capital from time to time.

The reason why REITs do that is because they are required by regulation to distribute 90% of their taxable income each year to enjoy tax–exemption, which is also why most REITs tend to have high dividend yields compared to stocks.3

However, this also means that REITs are not able to build up a cash reserve to strengthen their balance sheets or invest in more properties to grow their dividend or distribution per unit (DPU).

For REIT investors, you will need, from time to time, decide whether to subscribe to a rights issue or sell off your rights. Would you have enough liquidity to subscribe when the time comes? And would you have the expertise to analyse whether the rights issue is beneficial for you as an investor or not?

Another recent trend in the S–REIT space is the restructuring and consolidation of REITs. In the last 12 months, there were a slew of mergers & acquisitions of REITs which directly affects its REIT holders.

  • Apr 2019 – OUE Commercial REIT agreed to buy OUE Hospitality Trust to create one of Singapore's 10 biggest REITs.4
  • Jul 2019 – Ascott Residence Trust and Ascendas Hospitality Trust agreed to create the largest hospitality trust in APAC with $7.6 billion or assets comprising serviced residences and hotels.4
  • Nov 2019 – Frasers Logistics & Industrial Trust are planning to merge with Fraser Commercial Trust to have a combined entity that would manage almost 100 properties worth US$4 billion across Singapore, Australia and Europe.4
  • Jan 2020 – CapitaLand announced proposed merger of CapitaLand Commercial Trust (CCT) and CapitaLand Mall Trust (CMT) to form CapitaLand Integrated Commercial Trust (CICT) to become the third largest REIT in APAC and the biggest in Singapore, with a market cap of about $16.8 billion and property value of $22.9billion.5

Unlike a REIT, such corporate actions are undertaken by the portfolio manager in the REIT fund and you as a REIT fund investor do not need to shell out additional capital for rights issues, saving you the hassle and stress.

As REITs begin to gain popularity and as you begin your REIT investing journey, we hope that the above reasons could help you make a more informed decision between investing directly in a REIT vis–a–vis a REIT fund.

There is a growing list of real estate funds available. To find one that suits your preference, compare their returns and dividend yields by using our intuitive fund finder and start your no-fees investing journey with us now!

Global Real Estate – Janus Horizon Global Property Equities ‹ Quarterly dividends ˜2.23% p.a yield ›
APAC Real Estate – United Asia Pacific Real Estate Income ‹ Monthly dividends ˜5.17% p.a yield ›
Singapore Real Estate – Phillip Singapore Real Estate Income ‹ Quarterly dividends ˜5.71% p.a yield ›

Interestingly, Eastspring also recently launched their Asian Real Estate Multi Asset Income Fund, a one–of–a–kind income fund that marries both real estate and multi–asset as one – validating our earlier point that there has been vast interest in the real estate space and fund managers are also getting innovative on their end.



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Disclaimer

All information here is for GENERAL INFORMATION only and does not take into account the specific investment objectives, financial situation or needs of any specific person or groups of persons. Prospective investors are advised to read a fund prospectus carefully before applying for any shares/units in unit trusts. The value of the units and the income from them may fall as well as rise. Unit trusts are subject to investment risks, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currencies should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance. dollarDEX is affiliated with Aviva but dollarDEX does not receive any preferential rates for Aviva products as a result of this relationship. Unit trusts are not bank deposits nor are they guaranteed or insured by dollarDEX. Some unit trusts may not be offered to citizens of certain countries such as United States. Information obtained from third party sources have not been verified and we do not represent or warrant its accuracy, correctness or completeness. We bear no responsibility or liability for any error, omission or inaccuracy or for any loss or damage suffered by you or a third party (including indirect, consequential or incidental damages) arising in any way from relying on this information.

This information does not constitute an offer or solicitation of an offer to buy or sell any shares/units.
This article has not been reviewed by the Monetary Authority of Singapore.

Information is correct as of 14/02/2020.