The Three REIT ETFs and The Bedokian Portfolio

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.

1 – SGX News & Updates. SGX launches SGX APAC ex Japan Dividend Leaders REIT Index. 29 Aug 2016. http://www.sgx.com/wps/wcm/connect/sgx_en/home/higlights/news_releases/sgx_launches_sgx_apac_ex_japan_dividend_leaders_reit_index+ (accessed 9 Oct 2017)

2 – FTSE Russell. FTSE EPRA/NAREIT Asia Pacific ex Japan Index. 29 Sep 2017. www.ftse.com/Analytics/FactSheets/Home/DownloadSingleIssue?issueName=ENAA (accessed 9 Oct 2017)

3 – Morningstar. Morningstar Singapore REIT Yield Focus Index. 2017. https://corporate.morningstar.com/us/documents/Indexes/Singapore_REIT_Yield_Focus_Fact_Sheet.pdf (accessed 9 Oct 2017)

4 – Phillip Capital Management. Phillip SGX APAC Dividend Leaders REIT ETF. Product Info Sheet (Aug 2017). http://www.phillipfunds.com/uploads/funds_file/201708_Phillip_SGX_APAC_Dividend_Leaders_REIT_ETF_Product_Sheet.pdf (accessed 9 Oct 2017)

5 – Nikko Asset Management. NikkoAM-Straits Trading Asia Ex-Japan REIT ETF. March 2017. http://www.nikkoam.com.sg/files/sp/reit/documents/nikkoam-straitstrading-asia-ex-japan-reit-etf_product-info-sheet.pdf?v20170317 (accessed 9 Oct 2017)

6 – Lion-Phillip S-REIT ETF Fund Information. October 2017. https://www.poems.com.sg/wp-content/uploads/2017/10/Lion-Phillip-S-REIT-ETF-Fund-Information-Oct-2017.pdf (accessed 9 Oct 2017)

7 – The Bedokian Portfolio, p111

8 – The Bedokian Portfolio, p122-123

9 – Phillip SGX APAC Dividend Leaders REIT ETF Prospectus. 29 Sep 2016. http://www.phillipfunds.com/uploads/funds_file/Phillip_SGX_APAC_Dividend_Leaders_REIT_ETF_Prospectus_Final.pdf (accessed 9 Oct 2017)

10 – NikkoAM-Straits Trading Asia Ex Japan REIT ETF Prospectus. 27 Feb 2017. http://www.nikkoam.com.sg/files/documents/funds/prospectus/prospectus_axj-reit-etf.pdf?v20170317 (accessed 9 Oct 2017)

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)

12 – Khoo, Lynette. Singapore Budget 2018: Reit ETFs to enjoy tax transparency. The Business Times. 20 Feb 2018. http://www.businesstimes.com.sg/stocks/singapore-budget-2018/singapore-budget-2018-reit-etfs-to-enjoy-tax-transparency (accessed 26 Feb 2018)