Phillip Securities Pte Ltd, together with Singapore Exchange (SGX) is set to launch the first real estate investment trust (Reit) exchange traded fund (ETF), called the Phillip SGX APAC Dividend Leaders Reit ETF (SGX Stock Code: BYI) on October 20, 2016. This ETF product holds thirty top quality, highly rated publicly traded Reits across the Asia-Pacific region. The ETF tracks the newly created SGX APAC ex Japan Dividend Leaders Reit Index, and is structured as a smart-beta ETF where these are funds that follow an alternative weighting strategy as compared to the conventional cap-weighed indices.
Brief summary of Phillip SGX APAC Dividend Leaders Reit ETF
| SGX Counter Name (USD) | PHLP AP Div Reit US$ |
| SGX Counter Name (SGD) | PHLP AP Div Reit S$D |
| Trading Currency | USD (Primary) and SGD |
| Exchange Listing | Singapore |
| ETF Replication Method | Physical Replication |
| Dividend Distribution | Semi-Annual |
| Rebalancing Frequency | Semi-Annual |
| Number of holdings | 30 high quality, investment grade Reits in Asia-Pacific region |
| Manager | Phillip Capital Management (S) Ltd |
| Market Makers | Commerzbank AG, Flow Traders Asia Pte Ltd |
| Custodian | DBS Bank Ltd |
| Management Fee | 0.50 per cent per annum |
| Total Expense Ratio | 0.65 per cent per annum |
| Trading Board Lot Size | 100 units |
Source: Phillip Capital Management
Summary of the largest Reit holdings
| SGX APAC Ex-Japan Dividend Leaders Reit Index Constituents | ||
| Reits | Weights | Country |
| Link Reit | 11.21% | Hong Kong |
| Scentre Group | 10.30% | Australia |
| Stockland | 8.65% | Australia |
| Westfield Corp. | 8.23% | Australia |
| Vicinity Centres | 7.48% | Australia |
| GPT Group | 5.97% | Australia |
| Mirvac Group | 5.82% | Australia |
| Goodman Group | 5.66% | Australia |
| Ascendas Real Estate Investment Trust | 4.47% | Singapore |
| CapitaLand Mall Trust | 3.52% | Singapore |
| Suntec Real Estate Investment Trust | 3.14% | Singapore |
| CapitaLand Commercial Trust | 2.47% | Singapore |
| Mapletree Industrial Trust | 1.93% | Singapore |
| Mapletree Greater China Commercial Trust | 1.88% | Singapore |
| Investa Office Fund | 1.76% | Australia |
| Keppel Reit | 1.69% | Singapore |
| Mapletree Commercial Trust | 1.56% | Singapore |
| Mapletree Logistics Trust | 1.55% | Singapore |
| Charter Hall Group | 1.38% | Australia |
| Champion Reit | 1.28% | Hong Kong |
| Charter Hall Retail Reit | 1.22% | Australia |
| Shopping Centres Australia Property Gr | 1.19% | Australia |
| BWP Trust | 1.06% | Australia |
| Cache Logistics Trust | 1.05% | Singapore |
| Ascott Residence Trust | 1.03% | Singapore |
| Cromwell Property Group | 1.02% | Australia |
| Starhill Global Reit | 0.97% | Singapore |
| Frasers Centrepoint Trust | 0.92% | Singapore |
| CDL Hospitality Trust | 0.88% | Singapore |
| Abacus Property Group | 0.71% | Australia |
Source: Singapore Exchange Limited; As of August 26, 2016
As readers might have noticed, the largest weighting in the SGX APAC ex Japan Dividend Leaders Reit Index is Link Reit from Hong Kong. According to the background information obtained from Phillip Securities POEMS trading platform, Link Reit’s principal activity in Hong Kong is investment in retail properties and car park operations in Hong Kong. Its portfolio consists of properties with an internal floor area of approximately 11 million sq ft of retail space and approximately 80,000 car park spaces. The portfolio’s retail properties are located on the doorsteps of over 40 per cent of Hong Kong’s households, primarily serving the daily needs of people in Hong Kong.
According to a recently held ETF product presentation organised by the manager, Phillip Capital Management, one of the senior staff members mentioned that the retail properties in Hong Kong that are held by Link Reit are equivalent to the HDB retail shopping centres found in many neighbourhood estates in Singapore.
Comparison of percentage returns among peers
| Index returns p.a. (%) USD as of 30 Sept 2016 | ||||
| 1 year | 3 year | 4 year | 5 year | |
| SGX APAC ex-Japan Dividends Reit Index (NTR) | 27.2% | 7.2% | 6.2% | 12.3% |
| SGX APAC ex-Japan Dividends Reit Index (TR) | 27.7% | 7.9% | 6.9% | 13.0% |
| Thomson Reuters Global Real Estate | 6.3% | 5.4% | N/A | 9.2% |
| iShares Global Reit ETF | 7.3% | N/A | N/A | N/A |
| SPDR Dow Jones Global Real Estate ETF | 3.6% | 6.9% | N/A | 11.0% |
| Cohen and Steers Global Realty Majors ETF | 3.1% | 3.1% | N/A | 10.2% |
| FlexShares Global Quality Real Estate Index Fund | 5.1% | N/A | N/A | N/A |
| First Trust Heitman Global Prime Real Estate ETF | N/A | N/A | N/A | N/A |
| Global X SuperDividend Reit ETF | 17.0% | N/A | N/A | N/A |
Source: Phillip Capital Management, ETF.com, US-domiciled Reit and Real Estate Index Fund returns are as of October 10, 2016, TR: Total Return; NTR: Net Total Return
Although there is not many comparable Asia-Pacific region Reit ETFs, we noted that the global real estate and Reit ETF percentage returns appeared to have lagged behind the Reit and real estate-related ETFs in the Asia-Pacific region in the one- to five-year time frames. We think that there could be many factors which might point to the lag in global Reit and real estate returns due to a combination of demographics, differences in household incomes, industrial production, and level of robustness in the company profits, among others.
Fundamentals of SGX APAC Dividend Leaders Reit Index
| Fundamentals | Dividend Yield (%) | P/E Ratio | P/B Ratio |
| SGX APAC ex-Japan Dividend Leaders Reit Index (TR) | 5.19% | 10.32 | 1.17 |
| Ascendas Reit | 6.17% | N/A | 1.21 |
| Ascendas Hospitality Reit | 7.36% | N/A | 0.85 |
| Ascott Reit | 6.98% | N/A | 0.81 |
| CapitaLand Mall Trust | 5.31% | N/A | 1.14 |
| CapitaLand Commercial Trust | 5.46% | N/A | 0.91 |
| CapitaLand Greater China | 6.54% | N/A | 0.92 |
| Frasers Commercial Trust | 5.43% | N/A | 1.34 |
| Frasers Centrepoint Trust | 5.53% | N/A | 1.10 |
| Frasers Hospitality Trust | 10.72% | N/A | 0.82 |
| Mapletree Industrial Trust | 6.43% | N/A | 1.27 |
| Mapletree Greater China Commercial Trust | 6.62% | N/A | 0.88 |
| Mapletree Logistics Trust | 6.93% | N/A | 1.04 |
Source: Phillip Capital Management, The Fifth Person.com
When comparing the SGX APAC ex-Japan Dividend Leaders Reit Index to among some of the high-quality Reits listed on SGX, the gross dividend yield offered is quite competitive among the peers at around 5 per cent to 6 per cent per annum. Moreover, the price-to-book (P/B) ratio of the Index at 1.17 times book value is priced somewhere at the lower end of 0.8 times to 1.3 times of book value.
Asian Reits offer comparatively higher yield spreads
According to the senior officers of Phillip Capital Management who gave the ETF product presentation recently, they attributed the higher yield spreads seen in many Asia-Pacific countries could be due to the relatively low interest rate environment, particularly for Japan where interest rates are in the negative territory. The yield spread is measured by the average ETF dividend yields as compared to the long-dated government bond yield, which in the diagram shown above, Singapore offers one of the highest dividend yield spread of its listed ETF products as compared to many countries.
Geographical and sectoral concentrations of the SGX APAC Ex Japan Dividend Leaders Reit Index
Given the huge concentration of the Reit’s holdings in Australia, and in listed commercial Reits, many potential investors have expressed concerns over the impact of withholding taxes in Australia. According to the senior managers of Phillip Capital Management, they recognised that there are withholding taxes of 15 per cent in Australia as compared to none in Singapore and Hong Kong. However, with an expected gross and net dividend yield or around 5 per cent, and 4.5 per cent after taxes and total expenses respectively, the Phillip SGX APAC Dividend Leaders Reit ETF continues to offer quite good returns overall.
Advantages of investing in Phillip SGX APAC Dividend Reit Leaders ETF
- Diversification among 30 reits in Australia, Singapore and Hong Kong
- High quality, investment grade reits are available.
- Expected net dividend yield of 4.5 per cent per annum looks decent as compared to other risky financial instruments like junk bonds.
- Average Weighted average Lease Expiry (WALE) of the properties held by the listed reits is around 3 to 5 years.
Possible concerns
- Potential unexpected and rapid hikes in interest rates might result in poor returns.
- Potentially illiquidity in the ETF due to the historical trading history of reits in Singapore.
- Greater and more educational outreach is needed for ETF products in Singapore as many investors are or may be unfamiliar with the product.
- Average gearing ratio of the listed reits is around 30 per cent as compared to Australian-centric local reits like Frasers Logistics and Industrial Trust which has an average gearing ratio of around 25 to 26 per cent.
Summary
The Phillip SGX APAC Dividend Leaders Reit ETF is a diversified investment product and the first one launched in Singapore. We think that the ETF product can generate a sizeable amount of interest among investors. According to the senior managers at Phillip Capital Management, with an expected pricing of US$0.96 during its initial offering period which ends on October 12, 2016, they have received around US$25 million of in-house commitments from investors in Singapore, Malaysia and Thailand. This might provide some degree of confidence among retail investors who are seeking for stable investment returns in a reasonably good quality Reit ETF product amid the current market uncertainties.
Disclaimer: This article, along with its contents and illustrations do not constitute as recommendations to buy or sell the investment product. Please seek the advice of your financial adviser before undertaking any form of investments.
I am a licensed financial adviser at Phillip Securities Pte Ltd. My financial adviser (FA) code is THM300399401. I have subscribed 5,000 units of the Phillip SGX APAC Dividend Leaders Reit ETF product from Phillip Capital Management. I plan to adopt and buy-and-hold strategy for this ETF investment on a long-term basis.
