Wednesday, October 19, 2016

The New Phillip SGX APAC Dividend Leaders REIT ETF

Word has spread around of a new REIT ETF which has been launched for IPO just last week and closed on 13th October 2016. The ETF will begin trading in the market this Thursday 20th October 2016.

REIT has been an all time favourite for Singaporeans as it provides higher than average dividends which is quite a good dividend income for many people. With the new REIT ETF, it will be easier to diversify between different stocks instead of being concentrated with just a few REITs in our portfolio.

Phillip Capital invited some bloggers for a dinner and Q&A session on this new REIT ETF just last week. I was there as well to find out more information on this interesting development in Singapore. As we know, investing in funds, such as unit trusts, have high costs that comes with it. However, for ETFs, the cost is relatively lower which makes a difference in our investment returns.

Understanding more on the Phillip SGX APAC Dividend Leaders REIT ETF

Let me list down some of the details as well as the pros and cons of this REIT:

REIT ETF focuses on Australian properties

The first thing that caught my attention for the REIT ETF is the concentration of properties in Australia. 59% of this REIT index consists of Australian properties with 30% in Singapore and 11% in Hong Kong.

Here are the constituents of the index:

As we can see, the REIT index consists of 30 stocks with the focus on Australian stocks.

Pros of investing in the REIT ETF

I asked the Managing Director of Philip Capital why the choice to put more emphasis on Australian REITs and he gave some reasons for it which I will share below.

Here are the reasons:
  1. Australia Economy has not seen a recession for the past 25 years
  2. Australia shopping malls are crowded with good occupancy rates
  3. Gearing ratio is low at 30% or less
  4. Rental reversion is positive
  5. AUD currency has gone down and is somewhat at the bottom now
  6. Strong GDP growth of average 3%
  7. High productivity growth in the country
Those are the reasons I manage to capture at the dinner session. I was actually surprised to know that Australia did not have a recession for the past 25 years and their GDP growth is higher than many developed countries, including US and Singapore, with strong productivity growth.

Back home in Singapore, we are struggling with weak GDP growth, low productivity rates and weak retail outlook which the government is trying very hard to improve productivity here. In economics, productivity growth tends to increase the salary of workers which increases consumer spending and results in stronger economic growth. This is the reason why productivity growth is so important for a country to do well. 

Back to the REIT ETF, it is interesting to note that back testing was done for the REIT ETF and the annual compounded return was 13% for the past 5 years. The average dividend yield for the REIT is about 4.5% currently. 

So far, we have seen a lot of pros in investing in the REIT. How about the cons? 

Cons of investing in the REIT ETF
In every investment, there will be risk which we need to take note of. Here are some which I can think of:
  1. Focusing on overseas stocks will increase Forex risks
  2. 4.5% dividend doesn't seem too attractive for a REIT investor
  3. Concentration in one country adds in some risks if Australia economy doesn't do well
  4. We have no control over rights issue of any REITs in the component of the ETF
The risks are mainly due to the exposure to overseas stocks but if all is well and the AUD goes up plus the economy continues to do well, it will definitely benefit investors who invest in this REIT ETF. 

To me, this is a medium risk investment which beginner investor should not invest in unless they fully know what it is about. For seasoned investors, this may be an alternative investment fund to get exposure to the Australia market. What do you think of this new REIT ETF?

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  1. anything that comes with a 17% tax rate is trash

    1. Hi starmaster,

      Are you referring to the Australian tax? Yes its not that attractive in terms of tax as compared to SG REITs

    2. from what I read , the yield has been reduced to only 4.5% after accounting for taxes , multiple layer of fees and management cost .

      pretty ridiculous imo

    3. Hi starmaster,

      Yes same thoughts as well. Probably that's why the yield is that low.

  2. Nobody talks about the obscene management fees that a normal reit pays its manager each FY - million units thus diluting the reit value. Will this ETF obviate this anomally? Another thing - reits also like to issue rights - so whatever dpus given are unfairly taken back. What do you think and over to you for expert advice.

    1. Hi Koh,

      The REIT ETF is merely just tracking the movement of the components in it. However, it is quite complicated in terms of rights issue etc. We did ask Philip capital and they said they will act in the best interest of the fund and subscribe to the rights where necessary when there are rights issues.

    2. Quote " We did ask Philip capital and they said they will act in the best interest of the fund and subscribe to the rights where necessary when there are rights issues."

      Think useless answer to dilution question on future right issues. The Manager just say "Trust us as I act in the "best" interest without telling their strategies to deal with right issues. How Manager determine the "best" interest? Based on what?

      Acting on "Best" interest is just another Motherhood statement!

    3. Hi Uncle CW,

      Basically they will only know what is best during that time. If i did not remember wrongly, they also mention they will always try to get the rights to prevent dilution.

  3. Hi SGYI,
    The tax part will really kill the "yield " in long run ..i think the "diversification part" been oversold or over-rated ..especially its concentrated on AUS commercial property ..once the market hit on REIT ,, no counters would escape that ..
    Allowed me to quote " Two things are guaranteed in life: taxes and death. While you can’t control death, you could control how much you pay in taxes. That’s particularly true for dividend investors. " ,,, one can have same diversification by just buying few REITs listed in SGX with exposure to AUS/HKG/China and local market..
    Cheers !!

    1. Hi STE,

      Yes i agree it is still quite concentrated. On the taxes part, thanks for your sharing. Indeed taxes will kill the yield.