SGX is looking at setting up an Exchange Traded Fund (ETF) for Singapore Real Estate Investment Trusts (REITs) also known as S-REITs, in the second half of 2016. This ETF aims to track the index of the S-REIT 20 Index, which measures the performance of the top 20 largest S-REITs listed.
Top REITs in Singapore include:
- CapitaLand Mall Trust (CMT)
- CapitaLand Commercial Trust (CCT)
- Frasers Centrepoint Trust (FCT)
- SPH REIT
- Suntec REIT
- Ascendas REIT
- Mapletree Industrial Trust
- Mapletree Commercial Trust
What Are REITs
A REIT is a company that owns and operates properties while receiving income from their tenants through rent collection. There are different types of REITs, mainly retail, office, hospitality and industrial REITs.
Much like how you are the owner of your house, a REIT is the owner of many buildings. When you purchase a unit of the REIT, you are actually buying a small share in the REIT’s underlying properties. For example, by buying 100 units of CCT, you are buying a share in more than 10 properties that include Raffles City, Twenty Anson and Capital Tower.
Why Invest In REITs Rather Than Physical Property
What attracts investors to REITs is their high yield payout. Most S-REITs have yields that range from 5% to 8%. REITs pay out at least 90% of their profits as dividends. REITs provide investors with a stable and regular income, as well as the potential for capital gains.
As REITs are traded on the stock market, investors can easily buy and sell units of REITs. This makes REITs a very liquid investment, compared to owning physical properties of your own, since you can sell your ownership in the stock exchange without requiring a long time to find a buyer or seller.
In addition, not everyone has the luxury of half a million dollars to purchase a second property for investment purposes. REITs provide a more viable option for investing in property, where you can start investing with as little as a few hundred dollars rather than hundreds of thousands for properties.
Why ETFs Are Great
Most retail investors would have heard of the STI ETF. Rather than having to wisely choose a few winning companies to invest in, ETFs allow us to earn an average return from the biggest companies.
#1 No Need To Pick
By tracking the top 20 REITs in the market, there is no need for you to individually analyze the fundamentals of each REIT you are considering investing in. This makes investing in real estate possible, and easy, even for inexperienced investors that are unfamiliar with the market.
#2 No Need To Monitor
There’s no need for you to constantly monitor the market, making ETFs a great choice for busy retail investors that cannot afford the time to frequently look at the market.
That being said, we are not suggesting that you totally ignore your investment to the point where you don’t even know how it is performing. A periodic review of how your investments (including your REITs portfolio) are fairing is still important. Active management however may not be necessary if you have invested into a REITs ETF.
#3 Less Prone To Fluctuations
By purchasing the REITs ETF, you would immediately gain a diverse portfolio with 20 REITs. Global events have different effects on different industries. When one REIT does badly, another REIT might be performing better. This balances out the negative effect the impact of one REIT has on your entire portfolio, making it less prone to great fluctuations.
However, it is also important to note that there would be events that would affect all REITs. For example, REITs are always borrowing money to fund the acquisitions of buildings they have bought. An increase in interest rates will affect your portfolio, regardless of diversification that one has.
A REITs ETF, if set up, will allow investors to have a diversified portfolio or REITs. This comes in handy especially for those looking to grow their retirement fund. Much like the STI ETF, it makes investing simple for the average Singaporean.
Let’s hope the REITs ETF will become a reality in Singapore.
Read Also: How Does ETF Investing Work In Singapore
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