- REIT ETFs provide diversification across real estate sectors such as commercial, industrial, and residential, reducing risks associated with any single market downturn.
- With dividend yields typically ranging between 4% and 6%, REIT ETFs offer a stable and attractive income stream, especially in low-interest-rate environments.
- REIT ETFs offer liquidity and ease of access, allowing investors to buy and sell shares like stocks, making them a more flexible and cost-efficient way to invest in real estate.
In September 2024, the U.S. Federal Reserve made its first rate cut in four years, reducing interest rates by 50 basis points (bps). This decision has provided a major boost to real estate investment trusts (REITs), which typically benefit from lower interest rates due to reduced borrowing costs and higher profitability. This shift in monetary policy has made REITs even more appealing for investors seeking reliable income and long-term growth. This shift in monetary policy has triggered substantial interest in REIT exchange-traded funds (ETFs), leading to net inflows of SGD129 million in the first three quarters of 2024. As a result, the assets under management (AUM) of REIT ETFs surpassed SGD1 billion for the first time, marking a major milestone in the sector’s growth.
Here are the key reasons why REIT ETFs stand out as a smart investment choice for today’s market:
1. Diversification Across Real Estate Sectors
Investing in REIT ETFs gives you immediate access to a broad range of real estate sectors. These funds typically hold a portfolio of REITs that cover multiple sectors such as commercial, industrial, retail, and residential real estate. For example, the CSOP iEdge S-REIT Leaders ETF focuses on leading Singapore REITs like Mapletree and CapitaLand, which are spread across logistics, commercial, and industrial properties. This diversification minimizes the risk associated with any single real estate market or sector, protecting you from downturns in specific areas.
2. Stable and Attractive Dividend Yields
REIT ETFs are known for their consistent dividend payouts, which are derived from the rental income of the underlying properties held by the REITs in the ETF. In a low-interest-rate environment, this income stream becomes even more attractive. Many REIT ETFs in Singapore offer dividend yields between 4% and 6%, which far exceeds the returns from traditional fixed-income assets. For example, the Lion-Phillip S-REIT ETF currently offers a yield of 4.8%, making it an appealing option for income-focused investors.
Source: SGX
3. Liquidity and Ease of Access
Unlike direct real estate investments, which require significant capital and can be difficult to sell quickly, REIT ETFs provide the liquidity and convenience of stock-like trading. You can buy and sell REIT ETFs just like shares on the stock exchange, allowing you to enter and exit positions easily. This flexibility makes REIT ETFs a more accessible and practical way to invest in real estate, particularly for those who may not have the resources to purchase property outright. Moreover, lower trading costs and narrower bid-ask spreads—such as those seen with the NikkoAM-Straits Trading Asia ex-Japan REIT ETF—make REIT ETFs an efficient way to invest in real estate.
4. Geographical and Sector Diversification
REIT ETFs not only diversify across real estate sectors, but many also provide exposure to international real estate markets. The NikkoAM-Straits Trading Asia ex-Japan REIT ETF, for example, holds REITs from countries such as Singapore, Hong Kong, India, and South Korea, offering investors broader geographical diversification. This international exposure helps mitigate risks associated with local market downturns, while still allowing investors to capitalize on the growth of real estate markets in different regions.
5. Tax Efficiency
In Singapore, REIT ETFs enjoy tax advantages when invested through certain schemes. They are eligible for inclusion in the Supplementary Retirement Scheme (SRS) and Central Provident Fund (CPF), offering investors the potential to grow their retirement savings in a tax-efficient manner. This makes REIT ETFs even more appealing for long-term, income-focused investors who want to maximize their after-tax returns.
Several REIT ETFs in Singapore stand out for their performance, yield, and diversification:
- CSOP iEdge S-REIT Leaders ETF (SGX: SRT): With a dividend yield of 5.8%, this ETF focuses on the largest and most stable REITs in Singapore, providing exposure to key sectors like commercial and industrial real estate.
- Lion-Phillip S-REIT ETF (SGX: CLR): Offering a 4.8% yield, this ETF is highly liquid and focuses on a diversified portfolio of top Singaporean REITs, making it a great choice for income-seeking investors.
- NikkoAM-Straits Trading Asia ex-Japan REIT ETF (SGX: CFA): With a 5.6% yield, this ETF offers exposure to a diversified range of real estate across Asia, including major markets like Hong Kong and Singapore, providing geographical diversification.
Take Advantage of a Favorable Market Environment
With the combination of a favorable interest rate environment and record-breaking milestones in the REIT ETF market, now is an opportune time for investors to consider adding REIT ETFs to their portfolios. The stability and high yields offered by REIT ETFs, coupled with their diversification and liquidity, make them a compelling choice for both income-seeking and long-term growth investors.
Disclaimer: ProsperUs Head of Content & Investment Lead Billy Toh doesn’t own shares of any companies mentioned.
