While at the REIT Symposium last weekend, I noticed that Nikko Asset Management and Philip Capital had booths set-up in the exhibition hall. Their presence reminded me of the existence of REIT ETFs in Singapore. I’ve always wondered why their yields are typically lower (4-5%) than the REIT sector generally (4-7%). Curious to find out more, I took some time to examine the 3 REIT ETFs listed on the SGX. Here are some thoughts.
What is a REIT ETF?
A REIT ETF is a combination of 2 investment instruments into 1 – the REIT and the ETF.
A Real Estate Investment Trust (REIT) is a collective investment vehicle whereby the principal purpose is to invest in properties. Unitholders own the REIT, while the REIT owns the underlying properties.
An Exchange Traded Fund (ETF) is also a collective investment vehicle, however its principal purpose is to invest in a specific type of listed security. This could be stocks, bonds, commodities, etc. Investors own the ETF, while the ETF owns the underlying securities. How the ETF selects these securities is usually based on some theme (Technology sector for eg) or index (S&P 500 for eg).
A REIT ETF is essentially an ETF that invests specifically in REITs. Buying the ETF essentially is similar to buying all the underlying REITs, allowing you to quickly gain exposure to all the underlying REITs by simply buying 1 ETF.
Meet the ETFs
There are currently 3 REIT ETFs listed on the SGX Mainboard – NikkoAM-Straits Trading Asia Ex-Japan REIT ETF, Phillip SGX APAC Dividend Leaders REIT ETF and Lion-Phillip S-REIT ETF.
NikkoAM-Straits Trading Asia Ex-Japan REIT ETF (Nikko ST)
This ETF is managed by Nikko Asset Management. ETF Factsheet can be found here.
Here are some quick facts on this ETF:
- IPO Date: 29 March 2017
- Ticker Symbol: CFA
- Benchmark: FTSE EPRA Nareit Asia ex Japan Net Total Return Index
- Distribution Frequency: Quarterly
- Management Fees: 0.50%
- Total Expense Ratio: 0.60%
- Top 10 Constituents per below:
Phillip SGX APAC Dividend Leaders REIT ETF (Phillip SGX)
This ETF is managed by Phillip Capital Management. ETF Factsheet can be found here.
Here are some quick facts on this ETF:
- IPO Date: 20 Oct 2016
- Ticker Symbol: BYI
- Benchmark: SGX APAC Ex-Japan Dividend Leaders REIT Index
- Distribution Frequency: Semi-Annually
- Management Fees: 0.30%
- Total Expense Ratio: 0.65%
- Top 10 Constituents per below:
Lion-Phillip S-REIT ETF (Lion-Phillip)
This ETF is managed by Lion Global Investors in collaboration with Phillip Capital Management. ETF Factsheet can be found here.
Here are some quick facts on this ETF:
- IPO Date: 30 Oct 2017
- Ticker Symbol: CLR
- Benchmark: Morningstar® Singapore REIT Yield Focus Index
- Distribution Frequency: Semi-Annually
- Management Fees: 0.50%
- Total expense ratio: None specified
- Fund Constituents per below:
Comparing Constituent Yield to ETF Yield
I made the following observations in the process of trying to compare the ETF Constituent Yield versus Actual ETF Yield.
Heavily weighted to larger capitalisation REITs
This is highly evident in all 3 REIT ETFs. Below is the market caps of top 10 constituents of each REIT ETF.
Most REITs included are mega-cap REITs with at least $4b market capitalisation, with only small exceptions seen in Lion-Phillip. This is likely because of the REIT Screening Criteria used by the various indexes, which have minimum requirements in liquidity and free float size. Those indexes also seem to be market cap weighted, whereby REITs with larger market caps having a larger weightage.
The consequence of this is a low weighted average yield, as large cap REITs tend to have a lot of interest and are generally trading at a premium.
Low weighted average yield
To illustrate this, here is a summary of the current trading yields of top 10 REIT constituents of each ETF. I’ve also computed the weighted average yield based on portfolio size and compared it to current trading yield.
Variances despite fee and tax adjustments
Interestingly, despite making adjustments for all the the known costs and taxes, there is still a variance between weighted average constituent yield and trading yield. This probably due to other running costs like brokerage fees which are not included in the expense ratio computation.
Lessons learnt from this exercise
In summary, this exercise shows that there are 2 reasons for why REIT ETFs have relatively low yields.
- REIT Screening Criteria and Weightage – REIT indexes that REIT ETFs follow generally favour REITs with liquidity and large market cap. This results in the REITs included in the index being large cap REITs with the mid and small caps which have higher yields being shunned.
- Fund operation expenses – Between management fees, trustee fees, operational costs, compliance costs and transaction fees, the already low yields due to the REIT Screening Criteria take another haircut.
4 – 5% in yield for a largely income focused asset is hardly attractive, but at least you know you are investing in a well diversified basket of large cap REITs that are unlikely to go bust. That said, if you have even a mild interest in REIT investing and are willing to put in some research, I’m pretty sure you can easily beat the returns of the REIT ETFs.
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Happy Hunting,
KK
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