In the past, we’ve talked a lot about investing in real estate investment trusts (REITs) as well as investing in exchange traded funds (ETFs). Here, we look at an increasingly popular investment combining these two types of investments – REIT ETFs.
In just about a one-year period, three REIT ETFs have listed in Singapore. This comes on the back of the Lion-Phillip S-REIT ETF which will list on 30 October 2017 after the NikkoAM-Straits Trading Asia Ex Japan REIT ETF and the Phillip SGX APAC Dividend Leaders REIT ETF which listed on 29 March 2017 and 20 October 2016 respectively.
We should not be surprised by more companies trying to introduce such investment products here mainly because they combine several characteristics investors in Singapore love. Namely, investing in properties; receiving relatively good regular distributions as well as an increase in demand for passive investments in recent years.
Here are five things you should understand when deciding to invest in REIT ETFs in Singapore.
#1 Passive Investing
Investor interest in passive investing has grown in recent years. This is mainly due to the fact that many actively managed investment funds do not regularly beat passive investments and it also take away the complexity of having to research and monitor each investment on your own.
In the case of REIT ETFs, you don’t need to worry about making certain investment decisions when it comes to investments sizes or rights issue and having to fork out an additional sum of money or even voting at the individual REIT’s general meetings.
The managers of REIT ETFs will make many these decisions for you. In the case of the REIT ETFs in Singapore, they track indexes that will just make adjustments to their portfolios as and when the index they are tracking makes an update. They also tend to participate in the subscription and use internal funds for such actions.
If required, the managers of the REIT ETF will also be in a stronger position, considering they’re big enough, to talk to the REITs regarding decisions at the company.
Right off the bat, if you’re investing in a REIT ETF, you should already know that you’re only going to be exposed to a particular asset class – REITs. So, you have to consider that your investment portfolio isn’t adequately diversified if you’ve only put money into REIT ETFs.
Beyond that, you’re likely to be exposed to particular regions – namely Singapore, Australia, Greater China with all the REIT ETFs listed here.
Another diversification strategy you’ll enjoy is that the REIT ETFs invests in all types of properties, including retail, industrial and logistics, hospitality and offices.
For example, the Lion-Phillip S-REIT ETF sells itself as only investing in Singapore-listed REITs. This does not mean that it is only exposed to Singapore’s property market. Within its top 10 constituents, Mapletree Logistics Trust only has 31% of its portfolio in Singapore properties, the rest are located in Hong Kong, Japan, Australia and other Asian countries; Ascott Residence Trust only has 14% of its portfolio invested in Singapore properties; and Mapletree Greater China Commercial Trust has 100% of its portfolio invested in properties in Hong Kong and China. The other large constituents will also likely have exposure to overseas Asian countries.
For the NikkoAM-Straits Trading Asia Ex Japan REIT ETF has 60.5% of its portfolio invested in Singapore REITs and the Phillip SGX APAC Dividend Leaders REIT ETF only has two Singapore-listed REITs within its top 10 constituents.
Nevertheless, investing into ETFs allows you to diversify your investments with just one purchase and at a relatively low cost.
You can still buy and sell your shareholdings on SGX. This provides you with a similar liquidity to holdings individual REITs or other stocks.
Since the listing of NikkoAM-Straits Trading Asia Ex Japan REIT ETF, its share price has risen close to 9.2% and the Phillip SGX APAC Dividend Leaders REIT ETF has not actually seen much price appreciation.
Both of them are also trading close to their NAV (Net Asset Value) of $1.092 and $1.319 respectively.
#4 Management Fees
When you invest in a REIT, you’re already paying one layer of management fee to the REIT manager for their services. This is often tied to the asset under management by the REIT managers.
If you choose to invest in REIT ETFs, you’re paying an additional management fee for some of the convenience you are receiving. The good thing is that the REIT ETFs are passive investments and have generally low management fees.
The upcoming Lion-Phillip S-REIT ETF has a management fee of 0.5%, the NikkoAM-Straits Trading Asia Ex Japan REIT ETF has a management fee of 0.5% and the Phillip SGX APAC Dividend Leaders REIT ETF has a management fee of 0.5%.
On top of these, there are other fees that you have to bear, usually this includes trustee fees, administration fees as well as other fees related to being listed on SGX – legal fees, audit fees, transaction fees, valuation fees and others.
Of course, you will also have to pay a brokerage charge for buying and selling stocks.
REIT ETFs will also be subject to taxes.
First up, investors will have to bear corporate taxes that usually comes to about 17%. In addition, a withholding tax will also be applied to distributions coming from overseas-listed REITs – this will affect the REIT ETFs that have overseas investments but not the upcoming Lion-Phillip S-REIT ETF as all its constituents are listed in Singapore.
Should I Invest In REIT ETFs?
There are good reasons to invest in REIT ETFs – you’re diversifying your investments, investing passively, getting good returns, participating in potential growth of the economy, limited inputs required and so on.
However, over the long-term, fees and taxes could eat into your returns. So, you need to carefully judge whether investing on your own would make more sense. Do you really want to do the extra homework of researching and monitoring your investments?
There are always going to be reasons for and against investing a certain way, and you need to understand yourself as an investor before putting your hard earned money into any investments.