T-bill yields are falling. Time to look at this Singapore REIT ETF?

This post was created in partnership with CSOP Asset Management Pte. Ltd. All views and opinions expressed in this article are Beansprout's objective and professional opinions.

What happened?

“The time has come” - words that signal clear direction from the Federal Reserve Chairman Jerome Powell’s recent speech that interest rates may be cut as soon as next week.

This has led to a sharp fall in the yield on the Singapore T-bill in recent months, with the cut-off yield for the 6-month Singapore T-bill falling to 3.1% in the auction on 12 September. 

Those who are savvy are turning their attention towards high potential assets such as Singapore Real Estate Investment Trusts (REITs).

There are many options to invest in Singapore REITs - either as individual REITs or in a diversified manner through an ETF. 

If you are seeking a simple way to gain exposure to large, liquid Singapore REITs, the CSOP iEdge S-REIT ETF allows you to invest into a diversified portfolio of Singapore REITs.

Why look at REITs now?

REITs typically offer favourable and stable dividend yields, with Singapore REITs mandated to distribute at least 90% of their income to qualify for tax transparency treatment. 

Over the past few years, REITs have suffered as an asset class as interest rates rose - income alternatives like Singapore Savings Bonds (SSBs), T-Bills and money market funds saw higher interest rates and became more appealing relative to REITs. 

When safe instruments like SSBs offer risk-free yields as high as 3.5%, the market prices in the higher risk of owning REITs, and the prices of REITs fall.

When interest rates are expected to be cut, the reverse is expected to happen - REITs become more attractive as their yields would be more appealing relative to the lower market yield. 

But why is that so?

How can REITs benefit when interest rates get cut?

When interest rates are cut, REITs will have lower borrowing costs, which can make it more attractive for them to leverage up for new yield-accretive property acquisitions, and reduce interest expenses on existing debt.

When interest rates are cut, it also reduces the cost of borrowing for businesses who are tenants of the REIT. This may improve business sentiment and potentially improve occupancy rates and rental income - improving the yield of the REIT.

Introducing the CSOP iEdge S-REIT ETF

According to Cushman & Wakefield, Singapore is the largest REIT market in Asia outside of Japan, with a market value of US$75.8B as of Dec 2023, bigger than the other markets in Asia combined. 

Not only is it big, it is also growing. In fact, it is the only market in the top 3 REIT markets of Japan, Singapore and Hong Kong to grow year-on-year.

You can easily gain exposure to a basket of top Singapore REITs with a single ETF.

The CSOP iEdge S-REIT ETF (SRT.SI) was launched in Nov 2021 as an ETF tracking the iEdge S-REIT Leaders Index, which is an index maintained by SGX.

The index tracks the performance of the largest and most tradable REITs in Singapore such as CapitaLand Integrated Commercial Trust, Capitaland Ascendas REIT, and Mapletree Logistics Trust in their adjusted free-float market capitalisation weights with a 10% cap of any index constituent.

However, it might be worth noting that the 10% cap is applicable to each balancing review effective date. Due to market movements, the weight of a constituent REIT may end up being more than 10% in between the balancing review effective dates. 

The adjusted free-float market capitalisation means that the market value of the REIT is weighted by the shares available to the public. It is then further adjusted by a weighting factor that is applied based on the daily traded value of the shares

In other words, the higher the market value and daily trading activity of the REITs, the higher their weight will be in the index.

Advantages of the CSOP iEdge S-REIT ETF

The ETF provides you exposure to Singapore-listed REITs, which as illustrated above, is one of the most attractive REIT markets in Asia-ex Japan.

#1 - Simplified S-REIT Exposure

Instead of selecting individual REITs, you can gain broad exposure to the Singapore REIT market through a single investment. This may help with significant cost savings as you do not need to incur significant transaction fees to invest in a diversified basket of Singapore REITs.

For example, an investor dollar cost averaging monthly into the top 10 REITs in the ETF monthly would almost need to pay almost 10 times the cost of fees vs investing in the single ETF. 

#2 - Liquidity focus

The underlying index tracked by the ETF focuses on the largest and most tradable REITs in Singapore. For example, eligible companies must meet minimum standards for Average Daily Traded Value and free-float market capitalization on a regular basis to remain included in the index. 

Since REITs with a higher trading volume and velocity on a daily basis get weighted more heavily in the index, it serves to track and represent the more liquid segments of the REIT market.

Liquidity and activity may be a consideration if you’re looking to find and own REITs that are fairly priced by the market, while avoiding large transaction costs (through sub-optimal bid-ask spreads). 

#3 - Attractive Dividend Yield

As of 28 Aug 2024, the CSOP iEdge S-REIT ETF offers an impressive dividend yield of 6.03% based on the trailing 12 months, making it an attractive option if you’re seeking income in your portfolio. 

The dividend yield of 6.03% represents a yield spread of around 3.3 percentage points compared to 10Y Singapore Government Securities which currently yield 2.68% as of 28 Aug 2024 (Source: MAS)

This makes it an attractive option for income-seeking investors who are looking for a regular stream of income.

#4 - Professional Management

The ETF is managed by CSOP Asset Management Pte. Ltd., a wholly-owned subsidiary of CSOP Asset Management Limited. 

CSOP Asset Management Limited is a firm founded in 2008 as the first offshore asset manager set up by a regulated asset management company in China. Its subsidiary, CSOP Asset Management Pte. Ltd was established in Singapore in 2018 as the regional base offering clients in the region with investment opportunities. 

Bringing significant expertise in fixed income investments, notably in their money market funds like the CSOP USD Money Market Fund with more than US$600m (as of July 2024) in assets under management, it solidifies CSOP's reputation in managing income-focused investment products.

Risks

While the CSOP iEdge S-REIT ETF offers many benefits and a reliable income stream, you should be aware of some potential risks. 

The primary risk in the current environment is elevated interest rates where it may remain higher for longer. While the Fed has signalled that “the time has come for policy to adjust”, the timing of the rate cuts ultimately will depend on incoming data and macroeconomic outlook. 

If the Fed does not cut interest rates as expected in September, then high rates can negatively impact REITs by sticky borrowing costs.

What would Beansprout do?

With interest rates expected to be cut in the coming months, it might be worthwhile revisiting Singapore REITs once again. 

If you’re seeking an easy option to diversify and invest in a basket of Singapore REITs, the CSOP iEdge S-REIT ETF allows you to do that in a low-cost way.  

Compared to other REIT ETFs, the CSOP iEdge S-REIT ETF offers exposure to the largest and most liquid Singapore REITs, including many familiar REITs that are backed by strong sponsors.

To learn more about the CSOP iEdge S-REIT ETF, click here. 

Disclaimer

The investment product(s), as mentioned in this material, is/are registered under section 286 of the Securities and Futures Act (Cap. 289) of Singapore (the “SFA”). This material and the information contained in this material shall not be regarded as an offer or solicitation of business in any jurisdiction to any person to whom it is unlawful to offer or solicit business in such jurisdictions. 

CSOP Asset Management Pte. Ltd. (“CSOP”) which prepared this material believes that information in this material is based upon sources that are believed to be accurate, complete, and reliable. However, CSOP does not warrant the accuracy and completeness of the information and shall not be liable to the recipient or controlling shareholders of the recipient resulting from its use. CSOP is under no obligation to keep the information up to date. The provision of this material shall not be deemed as constituting any offer, acceptance, or promise of any further contract or amendment to any contract. The information herein shall not be disclosed, used or disseminated, in whole or part, and shall not be reproduced, copied or made available to others without the written consent of CSOP. 

Advice should be sought from a financial adviser regarding the suitability of the investment and/or investment product before making an investment. Investment involves risk. The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not necessarily indicative of future performance. Investors should read the prospectus and product highlights sheet, which can be obtained on CSOP website or authorized participating dealers, before deciding whether to invest. This material has not been reviewed by the Monetary Authority of Singapore.

Index Provider Disclaimer

The CSOP iEdge S-REIT Leaders Index ETF is not in any way sponsored, endorsed, sold or promoted by Singapore Exchange Limited and/or its affiliates (collectively, “SGX”) and SGX makes no warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the iEdge S-REIT Leaders Index and/or the figure at which the iEdge S-REIT Leaders Index stand at any particular time on any particular day or otherwise. The iEdge S-REIT Leaders Index are administered, calculated, and published by SGX. SGX shall not be liable (whether in negligence or otherwise) to any person for any error in the CSOP iEdge S-REIT Leaders Index ETF and the iEdge S-REIT Leaders Index and shall not be under any obligation to advise any person of any error therein.

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