Finally! A Reit ETF is about to debut on SGX

Source: Phillip Capital Management

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

Source: Phillip Capital Management

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

screenshot-of-geographical-breakdown

 

Source: SingaporeExchange Limited
Source: Singapore Exchange Limited

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

About Peak Hour 87 Articles
Hock Meng has 12 years of financial industry experience, including three years working as a research associate for a hedge fund company in Wall Street, US, with assets under management (AUM) close to US$400 million during its peak in 2008. Hock Meng is a Chartered Alternative Investment Analyst (CAIA) holder and passed his Level I Chartered Financial Analyst examinations. Hock Meng is licensed to provide investment advisory services in the area of unit trusts, dividend portfolio construction, securities wrap services, and life insurance planning