Is the NikkoAM-StraitsTrading Asia ex Japan REIT ETF Dividend Sustainable?

What happened? 

I recently received a question from an investor in the Beansprout community about the dividend payout of the NikkoAM-StraitsTrading Asia ex Japan REIT ETF (SGX: CFA). 

Specifically, he was curious about the most recent distribution for the period from 1 November 2024 to 31 January 2025, where about one-third of the payout was classified as a return of capital.

It’s a great question, and one that I think many income-focused investors might be wondering about too.

For those who may not be familiar, this ETF offers a simple way to get diversified exposure to REITs across the Asia ex-Japan region. 

It holds a mix of property trusts from markets like Singapore, Hong Kong, and China, and is currently the largest REIT ETF on the SGX by assets under management.

What makes it stand out even more is that it’s also the only REIT ETF listed on SGX that pays dividends quarterly, which makes it quite attractive for those of us who are investing in REITs for passive income. 

In the rest of this post, I’ll explain what a return of capital means, why it shows up in dividend payouts, and whether it’s something to be concerned about.

Why dividend sustainability matters for income-focused investors

As someone who relies on my investments to generate passive income, I’ve come to realise that dividend sustainability is everything.

It’s not just about how much I’m getting paid. It’s also about where those payouts are coming from.

Ideally, I want the distributions to be funded by real income, like rental earnings or capital gains. 

But if part of that payout comes from the fund’s own capital, what’s known as a return of capital (ROC), that’s a red flag to me.

Why? Because when a fund dips into its capital to maintain payouts, it’s essentially giving me back my own money. That reduces the fund’s net asset value (NAV), which also shrinks the base from which future income and growth can come.

Over time, this can eat into my total returns and weaken long-term performance. That’s why I always make it a point to check the source of any distribution and not just the headline yield.

It’s a small habit, but it helps me stay focused on building an income stream that’s not only regular, but also sustainable.

Overview of the NikkoAM-StraitsTrading Asia ex Japan REIT ETF (SGX: CFA)

The NikkoAM-StraitsTrading Asia ex Japan REIT ETF (SGX: CFA) aims to track the FTSE EPRA/Nareit Asia ex Japan REITs 10% Capped Index, which includes a broad mix of property types. This includes retail malls and office buildings to industrial spaces and hotels.

The ETF doesn’t just focus on one market. It gives investors access to REITs from across Asia (excluding Japan), with a good balance between different property sectors and geographies. 

As of 30 April 2025, Singapore made up about 69.3% of the portfolio, while Hong Kong accounted for around 12.8%.

As of 30 April 2025, the top five holdings of the NikkoAM-StraitsTrading Asia ex Japan REIT ETF include CapitaLand Ascendas REIT, CapitaLand Integrated Commercial Trust, Link REIT, Embassy Office Parks REIT, and Mapletree Industrial Trust.

How Are REIT ETF Dividends Typically Funded?

As of 4 June 2025, I noticed that the NikkoAM-StraitsTrading Asia ex Japan REIT ETF delivered a dividend yield of 5.9% per annum. 

REITs, by nature, pay out most of their rental income and other property-related earnings as dividends. With REIT ETFs like this one, those dividends are collected from the underlying REITs and then passed on to us as unitholders.

However, it’s important to understand what exactly makes up these payouts. Distributions from REIT ETFs can include:

• Net investment income (the dividends received from the REITs held in the fund)
• Other income and realised gains
• Return of capital (ROC), which is when part of the payout comes from the fund’s own capital

For the most recent distribution of 1.17 cents per unit covering the period from 1 November 2024 to 31 January 2025, approximately 0.42048 cents came from the capital component.

 In other words,  for the distribution of 1.17 cents per unit for the period from 1 November 2024 to 31 January 2025

• 35.9% was classified as return of capital
• 28.3% was from other income and gains
• 19.3% was from taxable income
• 16.5% was from tax exempt income

When I dug into the longer-term data, the picture became clearer.

Since the ETF’s inception in February 2019, the majority of its distributions have actually come from income and gains, with 60.5% from net investment income, 30.4% from realised capital gains, and only 9.1% from return of capital. 

In other words, about 90% of the payouts over time have been backed by underlying earnings and profits, not just “paying out my own money” in the form of returned capital. 

What are some of the reasons that a REIT ETF may not be able to pay out 100% of distributions through income and gains? 

Because the NikkoAM-StraitsTrading Asia ex Japan REIT ETF is actively traded, the amount of invested capital can fluctuate due to creation and redemption of units. 

The ETF also has to regularly rebalance its holdings to stay aligned with its index, which means there's a lot of buying and selling of underlying REITs happening behind the scenes.

All of this can create mismatches between when the ETF receives dividends from its REIT holdings and when it pays out to investors. 

That timing gap can sometimes result in part of the distribution being classified as return of capital, even if the overall income remains healthy.

Is the Dividend Level Supported by Underlying REIT Performance?

To get a better sense of whether the NikkoAM-StraitsTrading Asia ex Japan REIT ETF’s distribution yield is actually supported by its underlying REITs, I decided to take a closer look at the ETF’s top 10 holdings. 

These make up about 61.2% of the total portfolio, so I used them as a proxy to gauge overall performance.

Based on data as of 9 June 2025, the weighted average dividend yield of these top holdings comes in at around 6.06%. 

After factoring in the ETF’s 0.50% expense ratio, the net yield works out to be about 5.56%.

That’s not far off from the ETF’s current distribution yield of 5.9% as of the same date.

From this, it seems clear to me that the ETF’s distributions are largely backed by the actual income generated from its underlying REITs. 

In other words, the payouts appear largely supported by the portfolio’s real earning power, which is a reassuring sign for income-focused investors like myself.

Historical Distribution Trends and Consistency

One thing I’ve been tracking is the change in the distribution per share of the NikkoAM-StraitsTrading Asia ex Japan REIT ETF over time. 

For example, the total distribution per share fell from fiscal year 2023 to 2024. 

This drop isn’t too surprising when you consider the broader market backdrop, especially the sharp rise in interest rates over the past couple of years. 

As borrowing costs go up, REITs see more pressure on their distributable income, which in turn affects what they can pass on to unitholders.

That said, there’s another side to the story. While distributions have declined, the share price of the ETF has fallen even more sharply, and that’s actually pushed the distribution yield up to around 6.0% today.

It’s a pattern I’ve also noticed with other REIT ETFs, like the Lion-Phillip S-REIT ETF and the CSOP iEdge S-REIT Leaders Index ETF. Yields have become higher, even if the absolute payouts are slightly lower.

What Should We Watch For Going Forward?

That said, as much as I appreciate the current yield from the NikkoAM-StraitsTrading Asia ex Japan REIT ETF, I also know it’s important to stay mindful of the broader environment and the factors that could affect future payouts. 

Here are a few key risks I’m keeping an eye on:

1. Interest Rate Environment

Rising interest rates have been one of the biggest headwinds for REITs. Higher borrowing costs can eat into distributable income, which in turn puts pressure on dividend payouts. 

On top of that, when interest rates stay elevated, investors tend to shift towards safer assets like government bonds which can cause REIT prices to fall and affect overall returns.

2. Sector-Specific Challenges

Not all REIT sectors are performing equally. I’ve seen signs of softness in segments like business parks and offices. 

In Singapore, for instance, the vacancy rate for business parks has gone up due to falling demand, while office vacancies have risen in the past quarter because of an increase in new supply. 

These are things that can affect rental income, and by extension, distributions from the REITs that the ETF holds.

3. Foreign Exchange Movements

Since many of the REITs in the ETF’s portfolio generate income in foreign currencies like USD, JPY, or AUD, exchange rate movements also matter. 

If those currencies weaken against the Singapore dollar, the actual amount distributed in SGD terms can drop.

 Most REITs do hedge their income, but if the currency weakness is prolonged, it can still put pressure on DPUs.

What would Beansprout do?

After looking closely at the NikkoAM-StraitsTrading Asia ex Japan REIT ETF, I found the distributions to be mostly supported by net investment income.

Since February 2019, around 91% of the ETF’s distributions have come from income, not capital. 

Even if I zoom in on just the past four quarters, that figure holds steady at 90%. 

While there have been occasional uses of capital, this seems to be more seasonal than structural. 

That’s not uncommon for REIT ETFs that pay quarterly, especially when many of the underlying REITs only pay out semi-annually.

For me, the key is that the use of capital remains a small proportion over the long term. As long as that continues, I’d view the dividend as largely sustainable.

Hence, the NikkoAM-StraitsTrading Asia ex Japan REIT ETF remains a viable option for investors looking to gain broad based exposure to the REITs sector in a simple way. 

If you’re also exploring REIT ETFs for passive income, you can check out our guide to the best REIT ETFs in Singapore, where we compare dividend sustainability, historical performance, and fees across the major ETFs available on SGX.

Check out Beansprout guide to the best stock trading platforms in Singapore with the latest promotions to invest in NikkoAM-StraitsTrading Asia ex Japan REIT ETF.

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