Real Estate Investment Trusts (REITs), have been steadily growing in Singapore as a choice of investment since CapitaLand Mall Trust was first launched in Singapore in 2002. This rise in popularity is partially fuelled by Singaporeans’ love affiliation with property investments and the visible dividends that REITs in Singapore frequently distribute to their shareholders regularly.
Last week marked another milestone in the local REIT market as Phillip Capital launched its Phillip SGX APAC Dividend Leaders REIT ETF on 20 October 2016 at a listing price of S$1.310 or US$0.933. Proving that the combination of REITs (Real Estate Investment Trusts) and ETFs (Exchange Traded Funds) is a recipe more and more people are looking for, it raised more than S$30 million at its first closing.
As at the close of market last Friday (21 October 2016), the REIT ETF was trading at S$1.288 or US$0.922 – slightly under its listing price. Here are some things we should know about the Phillip SGX APAC Dividend Leaders REIT ETF before investing in it.
Is It Well-Diversified?
One of the main reasons for investing in an ETF is that we achieve ample diversification. For starters, anyone buying into this ETF will know that this is a REITs only portfolio which already limits diversification.
Adding to that, there is a concentration on properties in only three countries – Australia (59%), Singapore (30%) and Hong Kong (11%). Another point to note is that 47% of the index will have exposure to the retail sector. If you are wondering about the selections of the REITs in this ETF, it might be interesting to note that Australia has not had a recession for the past 25 years, and that Hong Kong’s Link REIT is the largest REIT in Asia currently.
Tracking SGX’s APAC ex Japan Dividend Leaders REIT Index, this REIT ETF has provisions to include good REITs from countries such as Australia, China, Hong Kong, India, Indonesia, Malaysia, New Zealand, Philippines, Singapore, South Korea, Taiwan and Thailand going forward. This means that when REITs in these markets become suitable, they will be added into the Index and by default, into this REIT ETF. This may provide for better diversity as the REIT ETF matures.
Another point to note is that while the REITs may be listed in certain countries, they themselves are diversified to certain extents. Singapore REITs such as Ascendas REIT has a portfolio of properties in Singapore, Australia and China. Mapletree Logistics Trust has a portfolio of properties in Australia, China, Hong Kong, japan, Malaysia, Singapore, South Korea and Vietnam. Similarly, some of the Australian REITs like Goodman Group has a portfolio of properties in the United States of America, Brazil, and across Europe and Asia.
While investors looking to build solid well-diversified investment portfolios for the long-term will need to look into other types of investments such as equities and bonds, this REIT ETF does make it very easy for investors to invest in REITs in Australia, Hong Kong and potentially other markets in Asia Pacific. With lots sizes of 100, amounting to minimum investments of just S$128.8, it also allows small investors to be able to buy into a wide mix of properties.
Dividend Weighted Rather Than Market Capitalisation
As mentioned earlier, SGX designed and built the index that this REIT ETF is tracking. The interesting point to note is that unlike how some other indexes work, this one will be focused on the absolute dollar amount that a REIT has distributed rather than the market capitalisation of it.
We do not see this as a problem as, logically, the REITs that has the financial muscle to distribute the most dividends in dollar terms, will also likely be the largest REITs.
Withholding Tax Issues For Investors
The current gripe with REIT ETFs, for this and future ones, is that while local investors putting money in Singapore-listed REITs will receive the full amount of distributions, REIT ETFs will be subjected to a withholding tax of 17%. This means that REIT ETFs will distribute less to individual and foreign corporate investors. Similarly, foreign authorities will also have such withholding taxes for distributions.
In a Business Times article on 21 October 2016, it is mentioned that SGX is still in talks with relevant authorities regarding this issue.
The take up for REIT ETFs could see greater traction if this withholding tax was negated.
The management fees for ETFs, because they track an index, should technically be cheaper that actively managed funds. In this case, Phillip Capital charges 0.5% in management fees and has committed to a maximum of 0.65% cost including trustee fees.
Compared to the STI ETF, Nikko AM charges 0.245% in management and trustee fees and SPDR charges 0.3% in annual costs, it is charging almost double the amount. This might be because the asset under management (or AUM) is still relatively low at $30 million. Nikko AM and SPDR’s STI ETF manages over $140 million and S$404 million in funds.
Phillip has already launched Singapore’s first REIT fund in 2011. This is a fund managed by Phillips Capital, and comparatively, it has a trustee fee of up to 0.12% and a management fee of 1.2%. In addition, there is a sales charge of 3% and a realisation charge of 3%, as well as imposes a minimum lot size of 1,000 units. So in comparison, the REIT ETF is a lot cheaper to purchase.
Adding the REIT ETF Into Our Portfolio?
As with any investments, there are risks associated with the REIT ETF. Being so focused on just properties and within certain markets mean economic conditions of those markets will have a great bearing on the performance of the REIT ETF. Also, with 70% of the portfolio in foreign REITs and taking into consideration that the local REITs have foreign exposure themselves, swings in foreign exchange will have an impact on how much the REIT ETF will be able to distribute as dividends.
Another thing to consider is that the current interest rate environment is low. Any increase in interest rates will mean that the REITs will have to refinance loans at higher rates in future, and this will impact how much they can distribute as well.
At the end of the day, investors can look forward to receiving approximately 4.5% in dividends every year. This is versus the extremely safe Singapore Government Bonds which gives approximately 1.7% in annual returns over a 10-year investment horizon. The additional return of 2.8% per annum is a risk premium that investors need to bear. They need to consider if the risks and the returns on offer for this product would help them improve their current portfolio.
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