Monday, May 31, 2021

REIT Mergers And Blurred Sectoral Lines: Shall I Go For A REIT ETF Instead?

The period of 2019-2020 had seen some of the big REIT mergers. To name a couple, we had the merger of CapitaLand Mall Trust and CapitaLand Commercial Trust, resulting in CapitaLand Integrated Commercial Trust, and OUE Commercial REIT absorbing OUE Hospitality Trust.

The concept of merger has its advantages. When REITs merge, there will be economies of scale in managing the whole thing, whether on debt management or acquisition of new assets. There is also the notion of size: the bigger a REIT is, the bigger its market capitalization would be, and of course the better its liquidity in the market.


From a retail investor’s point of view, such mergers may blur the lines between the different types of REITs, and with some observers expecting more mergers, the next obvious question will be: wouldn’t it be better to just buy a REIT ETF?


This is an interesting question to ponder, and I can already see two distinct plus points in going this way. The first will be no administrative hassle for the investor when it comes to mergers. Rather than the individual investor counting how many units of the newly merged REIT entity he/she will be getting (and calculating how many units to purchase to make the holdings a round number), the ETF manager would do all these behind the scenes. The second plus point is greater diversification: if REIT mergers bring about diversification of the assets, why not getting a bigger diversified “universe” covering these merged REITs via ETF?


However, going through the ETF way has its minuses, too, and surprisingly they are related to the advantages in the previous paragraph. The main crux is the lower expected returns in investing through an ETF rather than owning REITs direct (though this may not be the case across all instances). Firstly, managing an ETF requires expenses, which translates to the total expense ratio (TER) (and yes, this includes the ETF manager doing the “administrative hassle” as stated above). The TER is calculated as an annualized percentage of an ETF’s assets, and over the long run it may impact returns. Also, the diversified nature of an ETF meant that the returns and yield are averaged from across its holdings.


So, what is the conclusion? As always, my answer would be “it depends”. In investing, there are many styles and methods to it, just like there are different individuals with different preferences and risk appetites. In deciding on whether to go for REITs or ETFs (or both), you would still need to consider other points beyond my abovementioned pluses and minuses.


If you want to be an active investor and have more control, then you can go for REITs direct. If you are a passive investor who just rebalances your portfolio once or twice a year, then the ETF path is good (and save the headache of missing corporate actions related to mergers). The third way is to go for a core-satellite approach, and that is owning both REIT ETFs and REITs themselves, and for this you would need to be an active/passive hybrid investor.


Remember, there is no correct way in investing, for “correct” is a subjective word in this field.


  1. Agreed that there is no correct way in investment, only the most suitable way