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Do Singapore REITs have a place in our portfolio?

REITs

Written by:

Zhi Rong Tan

I am sure many Singaporeans own Singapore REITs. However, have you examined how SREIT fits into your overall investment strategy?

For those who don’t already have them, should you consider investing in SREITs? In truth, who are SREITs best suited for?

Today, we’ll answer these questions using data from SGX Research on SREITs & Property Trust.

What are SREITs?

For a full introduction, refer to our Singapore REITs guide.

In summary, sREITs or Singapore Real Estate Investment Trust are REITs listed on SGX. Despite their listing on the SGX, over 80% of the SREITs hold overseas assets.

REITs functions like companies that pool funds from investors to invest in income-generating properties and generate regular income for investors. While there are many different types of properties from shopping malls, offices, industrial buildings to hotels, each REIT will usually focus on one or two sectors.

Why do SREITs make popular investments?

Over the years, SREITs have grown in popularity in Singapore for a variety of reasons.

Firstly, it is the low barrier of entry to invest in properties. We can’t deny that Singaporeans love properties, as evident from the ever-increasing housing prices. SREIT provide another way for investors to dabble in properties, without much capital.

In addition, REITs are managed by professionals with deep knowledge of the industry. This allows investors to venture out of the residential property sector and gain exposure to other sectors like industrial buildings that most would not be able to do on their own.

Not only that, as SREIT are trading on the stock exchange, it is much more liquid as compared to physical properties. Think about how long it will take to sell a stock as compared to selling a property.

Lastly, due to the tax policy in Singapore, which states that REITs must distribute 90% of their income, investors of REITs can expect regular dividend payout every quarterly or semiannually. This sits well for investors who may want to collect extra ‘income’ to fund their retirement.

You should also be excited about the fact that there is no dividend tax in Singapore. You get to keep all the dividends you get!

To learn more about SREITs, you can read our updated “How to Invest in Singapore REITs” guide.

Why do SREITs deserve a place in your portfolio?

Other than the fact that we enjoy tax-free dividends in Singapore, here’re 5 reasons why I think SREITs deserve a place in our portfolios:

1 – Largest REIT market

Firstly, Singapore is one of Asia’s largest REIT & Property Trusts markets, with a total of 42 trusts and a combined market capitalisation of $108 billion.

In total, SREITs make up 12% of Singapore overall listed stocks and thus forms a crucial portion of the Singapore stock market.

2 – REITs offer better returns compared to other indices

SREIT vs REIT indices of neighbouring countries

The chart below shows the performance of four REIT indices.

In terms of performance, we can see that with exception to Malaysia REITs, all the REITs indices have performed well. To add on, SREIT was also the most resilient during the market crash last year and has since recovered the most compared to the other three.

Performance of REIT Indices. Singapore (Dark blue), Hong Kong (Orange), Australia (Cyan) and Malaysia (Yellow) Source: TradingView

SREIT vs STI

Comparing the SREIT index against Singapore’s broad market index, the Straits Time Index (STI), SREIT has also outperformed STI with or without the dividend reinvested.

As such, it could be a better choice as compared to buying STI ETF.

3 – Portfolio diversification

Investing in REITs also allows investors to have a certain degree of portfolio diversification due to the comparatively low correlation with other assets.

The correlation matrix between SREIT and other asset classes is shown in the table below. The closer the number gets to one, the more closely the two prices are tied. As a result, if one asset class experiences a price decline, the other asset class with a high correlation matrix will also experience a price drop. The reverse is also true.

As seen below, the correlation between SREITs and US Equities is at 0.70-0.75, which means there is a small degree of positive correlations. Another way we can see this is that when US Equities crash, SREIT may follow suit but to a smaller degree. This is a good thing for investors who have a mix of US equities and SREITs in their portfolio. Their US stocks would provide the portfolio with the growth they desire, while the SREIT would provide some stability during market downturns.

4 – Attractive yield for income investors

SREITs has also been providing the highest yield compared to other asset classes in SGX.

With an average yield of 5.7% and an average 10 year annualised total return of 8.4%, income investors can easily create a dividend portfolio towards their retirement.

Here are some interesting statistics on SREIT dividends.

Payouts may vary year on year

The chart below shows that the Distribution per Unit (DPU) of FTSE ST REIT Index has varied over the years. For income investors, this is something you should take note of as the decrease in dividend may affect your retirement should your plan depend solely on dividends.

Last year was a great example of how dividends can be affected during unforeseen circumstances. Many REITs were affected and had to reduce the amount of dividend it gives to their unitholders. Nonetheless, this is just a broad view. If we look into individual companies and only select good REITs, we can pretty much assure a stable dividend over the years.

Performance may vary across sectors

Splitting up into the sub-segments, Office REITs yields the most while Healthcare REITs yields are much lower. That is not to say we should invest in Office REIT instead of Healthcare REIT since it gives us a higher yield.

The reasons for low yield can be the result of the stability of a particular sector. For example, Healthcare REITs are here to stay as we would always need healthcare. By providing a stable dividend payout year on year, many dividend investors wouldn’t mind paying a higher premium for it.

On the other hand, it doesn’t mean that Office REITs are the most attractive. Such a high yield could be due to its beaten down share price and the uncertainty of the sector moving forward. Would we embrace work from home and render office spaces obsolete? Or will the rise in Chinese firms setting up offices here help boost the office demand?

No one knows the answers, which is why office REIT has not been doing well up till recently.

5 – Attractive risk to reward ratio

While we should strive for higher returns on our investments, we must also consider their volatility.

The chart below compares the volatility and yields of various indices. SREIT, along with the Hang Seng REIT index, can be found in the upper left. These are the indices to keep an eye on because indexes in this section have better yields and lower volatility. This is ideal for investors or retirees who want to protect their investment as their portfolios will not fluctuate too much while still receiving reasonable dividends.

REIT ETF

If you are lazy to research each SREIT individually, why not get a basket of them?

A REIT ETF offers instant diversification across different sectors and geographical regions. Additionally, such REITs automatically rebalance and make corporate actions decisions on your behalf, allowing you to save more time.

As of 2021, there are currently 3 Singapore REIT ETFs that focused exclusively on REITs and are listed on the Singapore exchange. These ETFs are Lion-Phillip S-REIT ETF, NikkoAM-Straits Trading Asia Ex-Japan REIT ETF and Phillip SGX APAC Dividend Leaders REIT ETF.

While they all track SREITs, there are still a few differences like geographical breakdown, the number of holdings and distribution frequency. For more information, you can refer to the table below and also visit their respective issuer websites.

Conclusion

I believe SREITs have a place in our portfolio, especially if we are looking for wealth preservation. The low volatility of SREITs and decent returns would provide many investors with peace of mind while investing.

For investors seeking growth, SREITs can also play a part in your portfolio. Given that growth stocks are generally more volatile, having some SREITs in your portfolio would lower your overall portfolio volatility, which is helpful during market crashes.

Of course, unlike growth stocks, we should not expect much growth from REITs.

Remember to always do your own research before investing! To learn how, you can read our free guide on How to Invest in Singapore REITs.

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