Thursday, 23 March 2017

SHOULD WE INVEST IN REIT ETFs?

Last October, the Phillip SGX APAC Dividend Leaders REIT ETF was listed on the SGX, the first REIT ETF to be available here. It aims to track the performance of the 30 highest total dividend-paying REITs in the Asia Pacific Region. At the end of this month, another REIT ETF, the Nikko AM Asia ex-Japan REIT ETF would be listed, giving investors an additional investment option. With their high and consistent dividend payouts, REITs generally appeal to investors seeking regular passive income.

Some investors may be deciding between investing in individual REITs or the REIT ETF. We believe that REIT ETFs are more suitable for investors seeking diversification, with smaller capital available and with limited time to research thoroughly on individual REITs. On the other hand, investors with more capital may want to select a few individual REITs, given their higher dividend yields compared to the REIT ETFs.

For investors looking to decide between the two REIT ETFs, we have highlighted some key differences:

Expense Ratio


Both REITs have expense ratios of 0.5% annually, compared to 0.3% for the STI ETF. The management fee is deducted before dividends are distributed. Investors should be aware of the expense ratios when investing in ETFs as it lowers our returns.


Geographical Exposure


Phillip APAC REIT ETF
Australia58.5%
Singapore28.5%
Hong Kong 11.0%

The Phillip APAC REIT ETF has holdings that are mainly REITs listed in Australia, Singapore and Hong Kong. As more than half of the constituents are listed in Australia, there is definitely some geographical concentration risk and foreign exchange risk. Because the ETF can be traded in both the US Dollar and Singapore Dollar, the strength of the Australian dollar against these currencies would have a significant impact on the ETF's performance.

Nikko AM Asia ex Japan REIT ETF
Singapore58.5%
Hong Kong 21.4%
China12.0%
Malaysia5.30%
Indonesia3.20%

As for the Nikko AM Asia ex-Japan REIT ETF, Singapore listed REITs make up the majority of its holdings, at 58%, followed by Hong Kong and China. Thus investors would be less exposed to foreign exchange risk as compared to the Phillip APAC REIT ETF.

However, even when REITs are listed in a particular country, it may still own properties in a number of countries. For example, while Ascendas REIT is listed in Singapore, it owns business parks and industrial properties in both Singapore and Australia.   


Sector Exposure


Phillip APAC REIT ETF
Retail47.70%
Diversified26.30%
Industrial & Office23.90%
Residential1.10%
Hotel & Resort1.00%


Nikko AM Asia ex Japan REIT ETF
Retail40.40%
Industrial & Office44.40%
Diversified9.60%
Residential2.20%
Hotel & Lodging2.00%
Speciality1.50%


Sector diversification is crucial as it would insulate investors from shocks in any specific sectors. Industrial and offices REITs are generally more cyclical, meaning that they would be affected by business cycles. The retail sector, which used to be relatively stable, is now facing the threat from the growing e-commerce industry that has put pressure on brick and mortar stores. As physical stores find it increasingly difficult to compete with online retailers, retail malls would find it challenging to maintain a high portfolio occupancy rate. Meanwhile, hospitality REITs are reliant on the tourism sector, and are dependent on whether the country remains an attractive tourist destination. 

Both ETFs are similarly diversified across sectors, though retail, industrial and office sectors still make up the majority of holdings.


Conclusion


We would recommend investors intending to invest a small amount of capital to consider these two REIT ETFs, as investing in individual REITs would incur high transaction costs. Investors who want to avoid analysing individual REITs can also choose this diversified option. Though both ETFs currently have yields of around 5% annually, we believe that the yield is not attractive enough, and would consider investing when the yields are closer to 6%.






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