Real estate is one of the top asset classes for Asian investors. For most women, owning a home is a lifelong dream and aspiration. It symbolises joy, emotional safety and, to a certain extent, financial security.
However, due to the large upfront capital needed, not all of us can afford a residential property, much less a commercial one. Even if we own a property, we still have to manage the maintenance and costs. This might require too much work for busy modern women trying to balance their families, career and finances. This is why it’s important for us to have suitable investment products that help us achieve our financial aims with minimal effort, thus freeing our time and energy for other life pursuits.
An asset class that has gained notable traction in recent years is Real estate investment trusts (REITs). In this article, we will discuss REITs and REIT ETFs in Singapore and why they may be a suitable investment option for busy career women.
What is a REIT?
A REIT is a special corporate entity that primarily owns or finances real estate, with the requirement of paying out operating income to investors. REITs may be traded on the Singapore Stock Exchange (SGX) as ETFs (Exchange-Traded Funds). Equity REITs are formed to purchase income-producing residential or commercial property, whereas mortgage REITs provide financing to the sector. Individual REITs typically focus on specific property types, such as office buildings, retail, multi-family housing, or even exotic properties, such as cell phone towers and data centres.
REITs offer retail investors the opportunity to participate in the ownership of a diverse number of properties without requiring large sums of capital associated with individual property ownership. This investment offers stable returns from real estate ownership while simultaneously reducing the risk inherent in holding individual properties. Furthermore, REITs and REIT ETFs are commonly traded in the stock exchange, making this a liquid investment, unlike individual properties.
How do REITs work?
REITs comprise a basket of real estate equity or debt investments. Unlike traditional companies, REITs are not subject to corporate tax. In return for this favourable tax treatment, REITs are required to pay out 90% of taxable income to shareholders, most commonly as non-qualified dividends. As a result, REIT dividend yields are often much higher than those paid by the average stock. Investors receive regular dividends and may also benefit from capital appreciation of the underlying properties.
REITs may be traded publicly (commonly through a stock exchange) or privately. Similar structures exist in most countries; this offers diversification opportunities in other markets. Investors seeking another form of diversification across a basket of publicly traded REITs may consider professionally managed mutual funds or exchange-traded funds (ETFs) that focus on the asset class.
Although past performance is not necessarily indicative of future returns, equity REITs have historically delivered total returns in line with the broader stock market over the long term.
Individual REITs vs REIT ETFs
Real estate investment trusts (REITs) may be considered individual real estate companies that own and operate real estate. When individuals purchase shares in REITs, they become part owners of these real estate companies.
On the other hand, REIT exchange-traded funds (ETFs) invest in various equity REIT securities. They often passively track real estate market indices.2 REIT ETFs offer investors exposure to the larger real estate sector without the risk of purchasing an individual REIT or company. REIT ETFs are good choices for the average investor who wishes to participate in the real estate sector while keeping her portfolio diverse to mitigate investment risk.
REITs and REIT ETFs are often traded on stock exchanges and are a liquid form of investment, unlike ownership of individual properties, which cannot be bought and sold easily.
The pros and cons of investing in REITs
REITs and REIT ETFs offer the opportunity for the retail investor to gain exposure in real estate with a relatively small amount of capital, as opposed to investing directly in properties. This frees up money for investment opportunities in other sectors and industries. Because shareholders of REITs and REIT ETFs are not involved in the active management of the real estate (e.g. buying, managing and financing the properties), valuable time is freed up for other life pursuits.
REITs and REIT ETFs generate passive income through regular dividends and possess the potential for capital gains.
REIT ETFs are managed by professional fund managers who select the underlying REITs by passively tracking an index that uses a rule-based methodology to create a portfolio or REITs, which takes into account factors such as size, liquidity, performance and fundamentals. For investors new to this asset class, REIT ETFs help take the guesswork out of deciding which individual REIT to invest in.
REIT ETFs often invest across different parts of the real estate sector, such as office buildings, retail spaces, industrial properties and residences. This provides an added layer of diversification to the investor.
Finally, REITs and REIT ETFs are often traded on the stock exchange. They are a relatively liquid method of investing in real estate instead of directly buying or selling property. Your savings may be mobilised quickly on a rainy day to cover unforeseen emergencies.
In general, real estate, REITs, and REIT ETFs have a low correlation to interest rates and the stock market. In a high-interest rate environment, bonds generally perform favourably compared to REITs. The reverse is true of REITs in a low-interest-rate environment. Therefore, REITs and ETFs might not offer one’s investment portfolio good protection against inflation.
Individual REITs focusing on one aspect of real estate may cause risk concentration for the investor. Certain property types, such as hotel REITs, are disproportionately affected during economic downturns and pandemics.
Because publicly traded REITs and REIT ETFs are traded in the stock exchange, this might lead to higher price volatility relative to the value of the underlying properties. REITs often trade at a discount or premium to the appraised fair market value of the underlying assets.
Unlike property owners, REIT and REIT ETF investors do not control the underlying assets, their purchase and sale, and their management.
NikkoAM-StraitsTrading Asia ex-Japan REIT ETF
In Singapore, NikkoAM-StraitsTrading Asia ex-Japan REIT ETF is the largest REIT ETF listed on the SGX with SGD 394.23 million assets under management as of (21 January 2023).
Why is NikkoAM-StraitsTrading Asia ex-Japan REIT ETF interesting?
1. One of the fastest-growing asset classes & focuses on the fast-growing Asia ex-Japan REIT market.
NikkoAM-StraitsTrading Asia ex-Japan REIT ETF provides investors with diversified access (geographically and sector) to the fast-growing Asia REIT market. The fund taps into growth opportunities in Asia, which is undergoing rapid urbanization and rests on strong economic fundamentals. It also invests in markets with robust regulatory support and high-quality offerings, such as Singapore and Hong Kong. Close to 75% of the underlying REITs in the ETF are listed in Singapore, while 15% are listed in Hong Kong.
- Tracks the FTSE EPRA NAREIT Asia ex Japan REITs 10% Capped Index – a carve-out of a globally recognised real estate benchmark.
Why is this important? The FTSE EPRA NAREIT Asia ex Japan REITs 10% Capped Index only can include companies in the Asia ex Japan region that qualified as REITs by international standards and passes certain liquidity threshold.
Some benefits are:
– Transparent, rules-based methodology
– The FTSE EPRA NAREIT Global Real Estate Index series as it is tracked by 37 ETFs with ~USD 30 Billion in AUM
– Real estate index with the longest track record
- Offers attractive dividend yields as compared with other markets.
Asia ex-Japan Real Estate Investment Trusts (REITs) offer some of the most attractive yields in the world.
- Quarterly dividend distributions.
This is great for female investors who are seeking regular passive income. It can also be a useful asset class in retirees’ portfolios.
Click here to see the quarterly dividend announcement for NikkoAM-StraitsTrading Asia ex-Japan REIT ETF.
- One of the cheapest expense ratios
NikkoAM-StraitsTrading Asia ex-Japan REIT ETF recently lowered the expense ratio to 0.55% (as stated Sept 2022 prospectus).
NikkoAM-StraitsTrading Asia ex-Japan REIT ETF is a worthy consideration for the investor with a low-to-moderate aggressive investment risk appetite, offering regular passive income and potential capital gains.
How to choose the right REIT for your investment goals
Getting started with REIT and REIT ETF investment may be a daunting task for the beginner. Here are a few tips to help you make an informed decision:
Search for yourself.
REITs and REIT ETFs carry potential risks and rewards. You should always understand your risk tolerance and choose an asset that aligns with your investment goals and risk appetite. How much of your investment portfolio should you allocate to real estate, and are you sufficiently diversified across other industries?Research the REIT/ETF
Look for data pertaining to the sectorial spread of the REIT or REIT ETF and their geographical exposure. Also, look for the dividend yield, the frequency of dividend release, the fund’s expense ratio, and past performance.
While past performance does not necessarily predict future performance, a fund that has been around for a longer time with consistent performance might potentially be a better bet than one with a short gestation and little or no data. Look for stable cash flow, consistent revenue growth and a healthy balance sheet.
Understand the market conditions.
Learning the underlying market fundamentals help one make informed investment decisions and improves chances of success. For example, during a recession, the demand for commercial real estate may decrease, potentially affecting the REIT ETF’s financial performance negatively.
Know the management team
The management team is crucial to a fund’s success. Research the management team’s experience and track record, and consider if they have a clear strategy for growing the fund.
A well-planned investment portfolio helps mitigate inflation, generate passive income and protect your assets. Choosing the right security is a key step in achieving your investment goals. We hope you have learnt more about a new asset class today to achieve your financial goals!