(Oct 16): Investors eyeing high yields from Singapore real estate investment trusts (S-REITs) now have a new option. On Oct 2, Lion Global Investors (LGI) and Phillip Capital Management jointly launched a new exchange-traded fund focused solely on this niche segment: the Lion-Phillip S-REIT ETF. The initial offer period opened on Oct 2 and will close on Oct 20. The issue price during this period is $1 per unit.
The fund is the third REIT ETF to be listed on the Singapore Exchange, after the Phillip SGX APAC Dividend Leaders REIT ETF in October last year, and the Nikko AM-Straits Trading Asia ex Japan REIT ETF in March. It also marks LGI’s entry into the ETF space. This is the first collaboration on an ETF between the asset manager and Phillip Capital, which are manager and sub-manager of the fund respectively.
The Lion-Phillip S-REIT ETF will track the Morningstar Singapore REIT Yield Focus Index, which comprised 23 S-REITs as at Oct 10. The fund will cap the weight of each constituent at 10% during index rebalancing every June and December. It intends to declare dividends every February and August.
The index constituents are weighted using a smart-beta methodology based on each REIT’s dividend yield and probability of default, as well as its economic moat, or competitive edge that can sustain long-term earnings. The indices for the Phillip SGX REIT ETF and Nikko AM-Straits Trading REIT ETF weigh their constituents by trailing 12-month dividend payouts and market capitalisation, respectively.
According to Gerard Lee, CEO of LGI, the smart-beta index sets the Lion Phillip S-REIT ETF apart from those using “plain vanilla, triedand- tested” methodologies. “We felt that we owe it to ourselves to have an index that actually is more fundamentally driven, and this also makes it more attractive to our investors,” he says.
He thinks the fund will be especially useful to global asset allocators who may be taking tactical bets on Singapore property. “For someone who wants to make a tactical asset allocation to S-REITs, he now not only has an ETF to move into but has one constructed based on smart-beta. So, we’re killing two birds with one stone.”
Banking on S-REIT growth story
Singapore currently boasts the second-largest REIT market in Asia, after Japan. The 15-yearold sector comprises at least 40 REITs and property trusts worth over $90 billion. The rapid growth of this sector is a regional “success story” that both investors and asset allocators can tap, says Jeffrey Lee, managing director and chief investment officer at Phillip Capital.
He illustrates how the Lion-Phillip S-REIT ETF could appeal to asset allocators in Japan’s regional banks. “For the last 20 years, all they’ve been doing is buying Japanese Government Bonds. But the JGBs’ yields have gone to almost zero. So now, that’s not the game to play. They need higher income-producing assets, such as the S-REITs. In a single stroke, they can get exposure to a highly-diversified port folio of quality S-REITs, at a return many times [that of] JGBs,” he says.
The fund is targeting to have $40 million to $50 million in assets under management. While declining to forecast the fund’s yield, Bryan Lim, senior manager for Asian equities at LGI, estimates that it “will not deviate too far” from 5%, given the “stable” portfolio. “A lot of property subsegments are reaching the bottoming of the cycle. Some of them have turned the corner. As such, we believe that the outlook for the S-REITs sector is very positive,” he says. The trailing 12-month yield of the Morningstar Singapore REIT Yield Focus Index is 5.75%.
Lim is also confident about the future of retail REITs, which have been losing ground due to the rise of e-commerce. Citing the entry of more tech-centric malls such as the revamped SingPost Centre, he says: “The retail sector will not be the same as five or 10 years ago. I think with the new innovations we are seeing, the new era of retail will happen in Singapore very soon.”
Overall, the fund achieves “good diversifi- E cation” to S-REITs, says Victor Wong, director of wealth management at Financial Alliance. The smart-beta methodology is an added bonus. “Any form of quality screening is always to the benefit of the investor,” he says. “I personally think this index has sound methodology, as it... assigns more weight to REITs that are competitively advantaged and financially healthy with sustainable, attractive dividend payouts.”
Low costs but taxes remain
Cost-wise, the Lion-Phillip REIT ETF is comparable comparable with its peers. The management fee is 0.5% a year — equal with that of the Nikko AM-Straits Trading REIT ETF, but higher than the Phillip SGX REIT ETF’s 0.3%.
Meanwhile, the total expense ratio will be capped at 0.6% for the next two years. The expense ratio of the Phillip SGX REIT ETF is 0.65%. (The data for the Nikko AM-Straits Trading REIT ETF is not available.)
However, even with the low costs, investors should note that ETFs are subject to local corporate taxes of up to 17%. This is unlike S-REITs themselves, which are exempted from taxes as long as they pay at least 90% of their income as dividends. Similarly, individuals who invest in individual S-REITs are not liable to taxes on dividend income and capital gains. This means that investing in an S-REIT through an ETF may produce lower returns than holding an individual S-REIT.
Tax liability was a key consideration in deciding whether to launch the ETF, Gerard says. He had hoped that the Inland Revenue Authority of Singapore (IRAS) would change its policy. “In fact, we were dragging our feet for so long, more than a year, because of this issue. [But] we made the business decision — that whether this concession is granted or not, we shouldn’t drag our feet any longer, because the other factors for launching an S-REIT ETF are very compelling.”
Jeffrey adds that although his company faced the same issue with the Phillip SGX REIT ETF, its index has generated more than 10% annualised returns over the past year. In the case of the Lion-Phillip REIT ETF, Morningstar’s smart-beta methodology will produce even more of a “value-add”, he says, while expressing hopes that IRAS’s policy will change.
More marriages ahead?
While it may be uncommon for two fund managers to launch an ETF together, Gerard reckons it is essential for smaller players. The ETF business is an “oligopoly” dominated by the likes of BlackRock and The Vanguard Group, he says. As the “big boys” would not be interested in niche segments like S-REITs, this creates an opening for smaller asset managers to collaborate and capture more market share than they could individually.
“We recognise that this is the lay of the land. Rather than having to face the prospect of having two S-REIT ETFs that are sub-scale, we think that by coming together, our [chances of] success will be a lot higher,” he says. This is especially since Singaporean investors have yet to warm up to ETFs.
Financial Alliance’s Wong believes that the collaboration is a good sign for the market. “At the moment, it may seem a little crowded with three REIT ETFs available. However, as this REIT sector develops and investors’ interest grows, there will be a product gap and I’m sure more interesting REIT ETFs will be launched,” he says.
With its first ETF off the ground, Gerard says LGI is looking to create more niche and innovative products. When asked whether the asset manager may collaborate with more of its competitors in future, he remains guarded: “It’s like when you’re dating someone, you don’t want to be double- or triple-timing. So, in front of Jeffrey, I would say no.” However, the CEO does not rule out more partnerships with Phillip Capital. In response, Jeffrey says: “I think we have great chemistry, and I would look forward to that.”
