[REITsSymposium Panel Review] Is it the Right Time to Invest in S-REITs?

During the Q&A session, Bruce highlighted how SRT offers diversified exposure to the real estate sector, providing stability and growth potential for investors. They also discussed current market trends and the strategic advantages of including REITs in a balanced investment portfolio. Bruce also reminds us that as funding cost is going to peak, investors should be prepared for the rebound of S-REITs using ETF vehicles like SRT.

CSOP iEdge S-REIT Leaders Index ETF was launched 2 years and a half ago tracking the SGX iEdge S-REIT Leaders Index. It comprises of 22 SGX-listed large and mid-cap REITs with liquidity. The ETF’s investment advisor is Shorea Capital. The implication here is that investors could enjoy active service by paying passive fees. Also, even all underlying holdings are S-REITs, their property exposure is beyond Singapore to APAC and global, allowing individual investors to access international exposure with 0 withholding tax. Since inception, SRT outperformed its benchmark by 63bp per annum gross of fees, which means even after deducting the 60bp TER, it still outperformed the benchmark by 3bps every year. The ETF’s most recent annualized dividend yield is more than 6% and the upcoming dividend payment is scheduled to be announced in July.

We prefer REIT ETF to individual REITs for now for 3 reasons:

First, we are likely ahead of a strong beta rally as the main drag of S-REITs over the past 2 years is the continuing Fed hikes. Now that the Fed may not cut immediately, it is also not going to hike any further. As interest rates peak and funding cost is going to peak, S-REITs have great potential for rebound, particularly for those leading names with strong fundamental.

Second, individual investors may have higher cost trading a single REIT vs. REIT ETF. This is because the ETF manager has dedicated trading team to trade underlying REITs with very low cost and can in turn transit this saving to clients, as reflected in narrower bid/ask spread on SGX.

Finally, it’s nothing wrong to pick single S-REITs, but the REIT ETF/index diversification could help investors lower their volatility and drawdown. Taking iEdge S-REIT Leaders index as an example, its volatility is lower than all its underlying REITs, and drawdown also lower than its largest holdings. Additionally, the large-mid cap focus with liquidity weighting will help investors capture sector rotation themes.

Even all SRT’s underlying holdings are S-REITs, their projects can be beyond Singapore, such as data centres in the US, hospitals in Japan, commercial REITs in China and even hotels in the Maldives. Thus, individual investors can access global REIT opportunities without any withholding tax.

One headwind is SGD strength which may drag down their overseas revenue. But as interest rates gradually peak, if the turning point arrives, it will drive up overseas business again.

Another headwind could be overseas fundamentals. First, the US and Japan fundamental looks resilient and Eurozone is bottoming out. Even for China, despite the growth pressure, the revenge spending post-reopening is still benefiting malls and hotels. As a result, all SGX-listed REITs are within our potential universe, regardless of their overseas exposure.

AI boom can benefit REIT/REIT ETF in 3 aspects:

First the upstream demand from AI may drive industrial/logistics REITs.

Second, the demand for calculation power by AI could further boost data centre REITs. Now SRT’s pure data centre REITs exposure is over 10% and a couple of industrial and multi-asset REITS also have data centre exposures.

Finally, the AI itself can help portfolio managers tracking index, picking REITs and designing index. In the longer term, it will gradually take the BAU job of PM.

Source: CSOP, as of 20240509.

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