When my ebook was launched in July 2016,
there was no local REIT ETF available to speak of. Fast forward to the present
day, there are now two REIT ETFs listed on the Singapore Exchange (SGX), and
one coming up soon. From an index investor’s perspective, this meant more
choices in selecting one or a few suitable for his/her investment objectives
and methodologies.
By now there are quite a number of articles
written about these three REIT ETFs on other investment sites and blogs. For my
post today, I will analyse them from a Bedokian Portfolio investor’s point of
view.
The three REIT ETFs, in chronological order
of their listing (with my given short form in brackets), are the Phillip SGX
APAC Dividend Leaders REIT ETF (Phillip APAC), the Nikko AM-Straits Trading
Asia Ex-Japan REIT ETF (Nikko-Straits Trading) and the Lion-Phillip S-REIT ETF
(Lion-Phillip). I had covered the former two briefly in my previous blog posts
(here and here), but I will delve a little bit deeper.
It’s All About The Indices
Each REIT ETF tracks a different index; The
Phillip APAC follows the SGX APAC Ex-Japan Dividend Leaders REIT Index; The
Nikko-Straits Trading tracks the FTSE EPRA/NAREIT ex-Japan Net Total Return
REIT Index; The Lion-Phillip’s benchmark is the Morningstar Singapore REIT
Yield Focus Index.
Diving in further, we now look at the
indices themselves. The SGX APAC Ex-Japan Dividend Leaders REIT Index is a
dividend-weighted index that measures the performance of REITs that pay the
largest dividends in the Asia Pacific region excluding Japan.1 The
FTSE EPRA/NAREIT ex-Japan Net Total Return REIT Index, on the other hand, tracks
the performance of listed real estate companies and REITs in developed and
emerging markets, and they are screened for their free-float adjusted,
liquidity, size and revenue.2 As for the Morningstar Singapore REIT
Yield Focus Index, the REITs are from Singapore and they are screened based on
the dividend yield, economic moat and distance to default.3
If the above paragraph confuses you, it is
OK. You may go on to the next section to find out more on how to choose your
REIT ETF. However, if you are concerned on the basis of the derivation of the
indices (and subsequently the REIT ETF’s following of them), then you could
include them in your consideration on the choice of REIT ETF.
The Underlying Allocation and Holdings
The next question would be: what is the
make-up of the REIT ETFs? There is a strong implication pertaining to this
query, and that is of diversification, which is one of the paramount factors in
The Bedokian Portfolio. We are actually looking out for the types of REITs,
their geographical locations and their respective allocations.
The Phillip APAC is made up of REITs from
mainly Australia (50.4%), Singapore (27.9%) and Hong Kong (14.4%), with their
percentages based on dividend weight. With the same weight basis, 42% came from
retail REITs, 25.7% from diversified REITs and 14.7% from industrial ones, with
the remaining from office, hotel, residential, etc.4
The two largest country allocation for the
Nikko-Straits Trading are Singapore (60.5%) and Hong Kong (23%), with
industrial and office REITs taking up 44.7%, and retail REITs at 39.7%.5
Lastly, the Lion-Phillip’s REITs are all
listed on the Singapore Exchange6 and they are well diversified in
terms of property types.
Back to diversification, the Phillip APAC
is viewed as a foreign component of the Bedokian Portfolio7, since
more than 50% of the dividends is from overseas. For both the Nikko-Straits
Trading and Lion-Phillip, with S-REITs being the majority, you could safely
treat them as local. If you want to really go into the specifics, however, you
could drill down to each individual S-REIT and find out their local-foreign
property and payout proportions, and decide from there.
Sector wise each REIT ETF has its own
majority, with retail the highest in Phillip APAC, industrials and office for
Nikko-Straits Trading, and office for Lion-Phillip.
Is it OK that we buy two or all three ETFs
to achieve a better balance? Sure, why not? But I have to stress that there are
some REITs which are common among the three, e.g. Ascendas REIT, Capitaland
Mall Trust, etc. You could adopt a core-satellite approach8, where
you could go for individual REITs whose regions/sectors that the REIT ETF did
not cover or emphasize much, but that meant deviating a bit from pure index
investing.
Another issue is whether they are physical
or synthetic. Based on their prospectuses, all three REIT ETFs use replication (meaning
physical) as the main strategy, though both Phillip APAC and Lion-Phillip may
use representative sampling strategy.9,10,11 In representative
sampling strategy, the ETF may include securities that are not part of the
original index, but share similar characteristics as that of the actual index
securities. To me, as long as the objective of the ETF is met and it closely
tracks the index, I am alright with it.
The Nitty-Gritty
Next we look at the management fee. The
Phillip APAC is 0.3% per annum, while both the Nikko-Straits Trading and
Lion-Phillip is 0.5% per year, so the latter two’s “maintenance” costs are
higher. My advice is not to focus on costs alone and look at them from a bigger
picture to see which is/are suitable for you.
Another little known issue would be taxes. According
to the prospectuses, there is a mention of the 17% income tax rate, in which
the dividend income issued by local REITs to the ETFs are subjected to it, but
not to the typical individual investor. Hence, in preferring the ETF to the
individual REIT, the compromise would be a lower yield due to taxation.
Further Considerations and The Bedokian’s
Take
There are a few more considerations in
choosing which REIT ETF, like perhaps their liquidity and bid/ask spread in the
financial markets, or your macro viewpoints on properties in general, or
country-specific. The factors in choosing which REIT ETF is non-exhaustive, but
at least I had pointed out, in my opinion, the more important ones in the above
sections.
Update - 26 Feb 2018
Following the Budget 2018 announcement, from 1 July 2018, the tax
transparency treatment for S-REITs will be extended to REIT ETFs as well12,
therefore providing a level playing field between individual REITs and REIT
ETFs, and investors alike.
7 – The Bedokian Portfolio, p111
8 – The Bedokian Portfolio, p122-123
11 – Lion-Phillip S-REIT ETF Prospectus. 28 Sep
2017. https://www.poems.com.sg/wp-content/uploads/2017/10/LionPhillip-S-Reit_ETF_-28-Sept-2017-Prospectus.pdf (accessed 9 Oct 2017)
