Greater exposure to S-Reits a bonus

A Reit ETF - a combination of two popular instruments, a real estate investment trust (Reit) and an exchange traded fund (ETF) - was launched on the Singapore Exchange (SGX) for the second time.

Yesterday, Nikko Asset Management and The Straits Trading Company listed the world's first NikkoAM-StraitsTrading Asia ex-Japan Reit ETF.

According to an SGX press release yesterday, this Reit ETF will track the FTSE's EPRA/NAREIT Asia ex-Japan REITs Net Total Return SGD index, which had a reported index yield of 5.72 per cent as of Jan 31.

About 70 per cent of its weightage will be on Singapore-listed Reits. The remaining 30 per cent will focus on Reits listed in Hong Kong and Malaysia.

The first Reit ETF, Phillip SGX APAC Dividend Leaders REIT ETF, which was launched by Phillip Capital Management last October, had drawn much interest from investors.

Even before it started trading on the mainboard, it had received more than $30 million in orders, reported The Straits Times last year.

This new investment product is classified as an excluded investment product, which means it is accessible to all investors.

SGX statistics released yesterday revealed that interest in ETFs is on the rise here.

The assets under management of retail ETF was up by 23 per cent last year (measured in Singdollars, invested by retail investors in SGX-listed ETFs).

DIVERSIFICATION

At the same time, the number of retail ETF holders was up 18 per cent (measured as unique investors holding at least one ETF listed on the SGX).

SGX's head of equities and fixed income, Mr Chew Sutat, said the listing reflects investor demand for Reit products.

"(It) offers investors diversification across geographical markets in Asia and high-growth Reit sub-sectors, including financial and tech hubs, hospitality and healthcare, all in a single trade," he said.

Mr Rusmin Ang, co-founder of investment education blog The Fifth Person, told The New Paper that a Reit ETF is a good option for someone who has little time to do research but wants to build a steady stream of dividend income by investing in a basket of Reits.

He pointed out that this new Reit ETF has a "plus point" - its greater exposure to Singapore Reits (S-Reits).

In comparison, S-Reits has only about 30 per cent weightage on Phillip's Reit ETF.

Mr Ang said: "With the new Reit ETF being more Singapore-centric, investors may prefer investing in it as S-Reits are more attractively priced compared to other markets at the moment."

According to Nikko Asset Management's website, S-Reits had a dividend yield of 6.6 per cent and Hong Kong Reits 4.9 per cent as of Jan 31.

An SGX report on March 7 also showed that the combined market capitalisation of S-Reits has almost doubled over the past five years, from $37.2 billion in 2012 to $71.6 billion this year.

"Singapore's Reit sector also maintains a competitive edge with higher average yields and lower average gearing ratios than the combined Reit sector of Japan, Australia and Hong Kong," it said.

SGX lists 32 Reits and six stapled trusts. All 38 had generated positive returns this year through to the close of March 6, with an average total return at 5.4 per cent.

The largest S-Reit by market capitalisation is Ascendas Reit, with a market capitalisation of $7.2 billion.

CapitaLand Mall Trust, with a capitalisation of $6.9 billion, remained Singapore's largest Reit by total assets at the end of last year. This is in addition to it being the largest retail Reit by market capitalisation.

But both firms, which are leaders in their fields of retail-related property and industrial property, foresee challenges ahead in light of the slowing economy and rising interest rates.

For instance, JTC estimated that islandwide vacancy for industrial property has risen to 10.9 per cent as at December last year, while new supply of about 2.2 million sq m of industrial space this year will put further pressure on occupancy and rental rates.

Ascendas Reit acknowledged that higher interest rates will result in higher interest expense and lower distributions a unit (DPU).

The manager of CapitaLand Mall Trust also noted softer economic conditions and that going forward, it will continue to focus on sustaining DPU.

PROSPECTS

An OCBC research investment report on March 23 is also less upbeat about the prospects of S-Reits, noting the probability of three - instead of two - rate hikes this year.

The report stated that slower DPU growth can be expected, and it urged investors to be selective of their Reit choices.

"While we believe S-Reits still warrant a strategic position in investors' portfolio in light of uncertainties surrounding the geopolitical and macroeconomic environment, valuations are no longer compelling," the OCBC analysts added.

Nonetheless, Mr Ang is less worried about rising rates. He thinks that investors of Nikko's Reit ETF will be in a "relatively safe" position despite the hikes.

"Historically, S-Reits have performed relatively well even during the last period of interest rate hikes from mid-2004 to end-2006 - the FTSE ST REIT index surged more than 80 per cent then.

"Today, S-Reits are less heavily geared (a specified ratio of debt to the value of its ordinary shares) than they were in the past. Regulations now restrict a Reit's gearing limit to 45 per cent."