Investors Turn to S-REITs: A Closer Look at August's Performance

Moomoo News SG wrote a column · Sep 12, 2024 10:38

S-Reits saw a net institutional inflow exceeding S$90 million in August, marking the second consecutive month of positive net inflows following July's S$15 million. In contrast, the first half of the year primarily experienced net outflows.

The iEdge S-REIT Index recorded positive returns for the second month, rising by 5.83% in August, following a 6.19% increase in July. This brings the total gain for the initial two months of the second half of 2024 to 12.02%, reversing the -13.18% decline in the year's first half.

Investors Turn to S-REITs: A Closer Look at August's Performance

Driven by the potential Fed rate cuts, the fundamentals of S-REITs also suggest an optimistic outlook.

1. The real estate sector is highly sensitive to interest rates, with bank borrowing playing a critical role in the capital management of real estate investment trusts (REITs). The anticipated interest rate cuts could lower borrowing costs for REITs, particularly those with a higher proportion of floating-rate debt or refinancing needs. Furthermore, rising real estate valuations may enhance the net asset values of these trusts, encouraging increased investment flows.

2. High-dividend REITs attract investor interest in an environment characterized by expectations of lower interest rates and market volatility. Adopting a high-dividend strategy can provide investors with a relatively stable income stream and a degree of protection against market fluctuations. Generally, regulations require REITs to distribute at least 90% of their net profits to unitholders while maintaining a leverage ratio (also known as debt-to-equity ratio) below 50%.

3. With improving economic activity and tourism in the region, sectors such as local retail and hotel REITs are likely to see significant benefits, further contributing to a broader index recovery, especially with events like the upcoming F1 race in Singapore.

In addition to S-REITs, REIT tracking ETFs also merit investors' attention.

While ETFs have been trading on the SGX for a long time, REIT tracking ETFs actually made their debut in 2016. Currently, 5 REIT tracking ETFs are traded on the SGX. Dan Chang, a Trading Representative at Phillip Securities, highlighted several advantages of investing in S-REIT ETFs:

1. High price transparency: S-REIT ETFs trade like stocks on the Singapore Exchange, allowing investors to see the exact prices at which they buy or sell.

2. Investors can purchase a basket of S-REITs through a single investment instrument, which is particularly beneficial for beginners and busy investors.

3. Cost efficiency: S-REIT ETFs are index-tracking funds, predominantly passively managed, resulting in generally lower expense ratios.

The following charts outline the top 10 trusts in the iEdge S-REIT Index with the highest percentage change in August and the five REIT ETFs currently trading on the SGX.