Time to look at this REIT ETF?

“The time has come” - words that signal clear direction from the Federal Reserve Chairman Jerome Powell’s recent speech that interest rates may be cut as soon as next week.

This has led to a sharp fall in the yield on the Singapore T-bill in recent months, with the cut-off yield for the 1-month Singapore T-bill falling to 2.71% in the auction on 12 September.

Those who are savvy are turning their attention towards high potential assets such as Singapore Real Estate Investment Trusts (REITs).

There are many options to invest in Singapore REITs - either as individual REITs or in a diversified manner through an ETF.

REITs typically offer favourable and stable dividend yields, with Singapore REITs mandated to distribute at least 90% of their income to qualify for tax transparency treatment.

Over the past few years, REITs have suffered as an asset class as interest rates rose - income alternatives like Singapore Savings Bonds (SSBs), T-Bills and money market funds saw higher interest rates and became more appealing relative to REITs.

When safe instruments like SSBs offer risk-free yields as high as 3.5%, the market prices in the higher risk of owning REITs, and the prices of REITs fall.

When interest rates are expected to be cut, the reverse is expected to happen - REITs become more attractive as their yields would be more appealing relative to the lower market yield.

But why is that so?

When interest rates are cut, REITs will have lower borrowing costs, which can make it more attractive for them to leverage up for new yield-accretive property acquisitions, and reduce interest expenses on existing debt.

When interest rates are cut, it also reduces the cost of borrowing for businesses who are tenants of the REIT. This may improve business sentiment and potentially improve occupancy rates and rental income - improving the yield of the REIT.

Not only is it big, it is also growing. In fact, it is the only market in the top 3 REIT markets of Japan, Singapore and Hong Kong to grow year-on-year.

You can easily gain exposure to a basket of top Singapore REITs with a single ETF.

The index tracks the performance of the largest and most tradable REITs in Singapore such as CapitaLand Integrated Commercial Trust, Capitaland Ascendas REIT, and Mapletree Logistics Trust in their adjusted free-float market capitalisation weights with a 10% cap of any index constituent.

However, it might be worth noting that the 10% cap is applicable to each balancing review effective date. Due to market movements, the weight of a constituent REIT may end up being more than 10% in between the balancing review effective dates.

The adjusted free-float market capitalisation means that the market value of the REIT is weighted by the shares available to the public. It is then further adjusted by a weighting factor that is applied based on the daily traded value of the shares

In other words, the higher the market value and daily trading activity of the REITs, the higher their weight will be in the index.

The ETF provides you exposure to Singapore-listed REITs, which as illustrated above, is one of the most attractive REIT markets in Asia-ex Japan.

Instead of selecting individual REITs, you can gain broad exposure to the Singapore REIT market through a single investment. This may help with significant cost savings as you do not need to incur significant transaction fees to invest in a diversified basket of Singapore REITs.

For example, an investor dollar cost averaging monthly into the top 10 REITs in the ETF monthly would almost need to pay almost 10 times the cost of fees vs investing in the single ETF.

The underlying index tracked by the ETF focuses on the largest and most tradable REITs in Singapore. For example, eligible companies must meet minimum standards for Average Daily Traded Value and free-float market capitalization on a regular basis to remain included in the index.

Since REITs with a higher trading volume and velocity on a daily basis get weighted more heavily in the index, it serves to track and represent the more liquid segments of the REIT market.

Liquidity and activity may be a consideration if you’re looking to find and own REITs that are fairly priced by the market, while avoiding large transaction costs (through sub-optimal bid-ask spreads).

As of 28 Aug 2024, the CSOP iEdge S-REIT ETF offers an impressive dividend yield of 6.03% based on the trailing 12 months, making it an attractive option if you’re seeking income in your portfolio.

This makes it an attractive option for income-seeking investors who are looking for a regular stream of income.

#4 - Professional Management

CSOP Asset Management Limited is a firm founded in 2008 as the first offshore asset manager set up by a regulated asset management company in China. Its subsidiary, CSOP Asset Management Pte. Ltd was established in Singapore in 2018 as the regional base offering clients in the region with investment opportunities.

Bringing significant expertise in fixed income investments, notably in their money market funds like the CSOP USD Money Market Fund with more than US$600m (as of July 2024) in assets under management, it solidifies CSOP's reputation in managing income-focused investment products.

While the CSOP iEdge S-REIT ETF offers many benefits and a reliable income stream, you should be aware of some potential risks.

The primary risk in the current environment is elevated interest rates where it may remain higher for longer. While the Fed has signalled that “the time has come for policy to adjust”, the timing of the rate cuts ultimately will depend on incoming data and macroeconomic outlook.

If the Fed does not cut interest rates as expected in September, then high rates can negatively impact REITs by sticky borrowing costs.

With interest rates expected to be cut in the coming months, it might be worthwhile revisiting Singapore REITs once again.

If you’re seeking an easy option to diversify and invest in a basket of Singapore REITs, the CSOP iEdge S-REIT ETF allows you to do that in a low-cost way.

Compared to other REIT ETFs, the CSOP iEdge S-REIT ETF offers exposure to the largest and most liquid Singapore REITs, including many familiar REITs that are backed by strong sponsors.

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