Last week, the world of Real Estate Investment Trusts (REITs) reached an extraordinary milestone. The combined Assets Under Management (AUM) of REIT tracking ETFs soared to a record S$917 million. This surge has been accompanied by a significant increase in daily trading volumes, which have nearly doubled compared to last year. With the U.S. Federal Reserve potentially on the brink of cutting interest rates in September, is this the right time for investors to jump on the REIT bandwagon? Let’s dive into the details.
Record-Breaking AUM and Rising Trading Volumes
As of the end of last week, REIT ETFs have not only hit new highs in AUM but have also seen a dramatic rise in daily turnover. The average daily turnover (ADT) since the end of June has skyrocketed to S$4.6 million, marking a nearly 60% increase from the first half of 2024 and an astounding 200% rise from 2023 levels.
This has also led to a remarkable performance of the iEdge S-REIT Index, which achieved a 10% total return in the first eight weeks of the second half of 2024. This performance is particularly impressive, given that the index had suffered an 11% decline in the first half of the year. The rebound reflects a shift in investor sentiment, fueled by growing confidence in a potential Fed rate cut at the upcoming September FOMC meeting. Such a move could signal the easing of global financial conditions, providing a more favorable environment for REITs.
Top Performers Among REIT ETFs
Several REIT ETFs have stood out in this favorable climate:
· Lion-Phillip S-REIT ETF (CLR): The largest of the REIT tracking ETFs listed on SGX, this fund’s AUM reached S$443 million by the end of August. The ETF delivered a stellar 10.7% total return in the first eight weeks of 2H24, with its ADT surging by 145% compared to the first half of the year.
· NikkoAM-Straits Trading Asia Ex-Japan REIT ETF (CFA): This ETF saw a modest 5% increase in AUM, bringing its total to S$333 million. The fund achieved an 8.8% total return in 2H24 to 23 August and saw a 35% increase in retail trading volumes.
· CSOP iEdge S-REIT Leaders ETF (SRT): With the highest dividend yield of 6.1% among the REIT ETFs, this fund rebounded with a 10.5% total return in 2H24. It also experienced a 92% increase in ADT compared to 1H24.
What Investors Can Learn and Key Takeaways
The recent surge in REIT ETF AUM and trading volumes highlights a growing optimism among investors, driven by expectations of a Fed rate cut and the potential easing of financial conditions. For investors considering adding REIT ETFs to their portfolios, here are some key takeaways:
1. Dividend Yields Remain Attractive: REIT ETFs like the CSOP iEdge S-REIT Leaders ETF offer competitive dividend yields, which can provide steady income in a low-interest-rate environment.
2. Strong Performance Amid Market Volatility: Despite the volatility in the first half of the year, many REIT ETFs have delivered strong returns in the second half. This resilience could continue if global financial conditions improve.
3. Liquidity and Trading Volume Increases: The sharp rise in trading volumes indicates growing investor interest and liquidity in the REIT ETF market. This can lead to tighter bid-ask spreads and more efficient price discovery.
Is It a Good Time to Invest in REIT ETFs?
With the potential for a Fed rate cut on the horizon, the macroeconomic environment may become more favorable for REITs, making it an opportune time to invest. However, investors should remain cautious and consider the following risks:
· Interest Rate Sensitivity: While a rate cut is expected, any unexpected shifts in Fed policy could impact REIT valuations. Rising rates could lead to higher borrowing costs for REITs, which may pressure their profits and dividend payouts.
· Global Economic Uncertainty: Although REITs have shown resilience, they remain vulnerable to broader economic downturns. Investors should keep an eye on global economic indicators and geopolitical developments that could impact market sentiment.
Looking Ahead
As we move closer to the September FOMC meeting, all eyes will be on the Fed’s decision and its implications for the REIT market. For investors looking to capitalize on the recent momentum in REIT ETFs, this period offers both opportunities and challenges. With careful consideration of the potential risks and rewards, REIT ETFs could be a valuable addition to a well-diversified portfolio.
Disclaimer: ProsperUs Head of Content & Investment Lead Billy Toh doesn’t own shares of any companies mentioned.
