Singapore has often been likened to Hong Kong as a financial centre due to similarities such as their strategic location and openness to trade.
Both countries are considered important regions within the Asia Pacific REIT market.
Today, we compare REITs from these two geographies to see how they stack up against each other.
Singapore REITs vs Hong Kong REITs
To gauge the performance of REITs in Singapore (SREITs) and Hong Kong (HKREITs), we obtained the returns of the iEdge S-REIT Leaders Index and the Hang Seng REIT Index, respectively.
On a year-to-date (YTD) basis, HKREITs outshone SREITs, returning 13.8% compared to 6.5%.
However, if we were to stretch out the investment horizon, losses from SREITs were less than those of their Hong Kong counterparts.
For instance, the five-year annual return for SREITs stood at -1.2% while that of HKREITs came in at -7.7%.
This performance seems to imply that HKREITs exhibit characteristics more suitable for investors with a higher risk tolerance as they provide higher returns that are accompanied by higher risks.
The difference in performance could boil down to there being just four constituents in the Hang Seng REIT Index versus 26 constituents in the iEdge S-REIT Leaders Index.
By having fewer components, the former has less sector and geographic diversification.
How REITs compare against the market
We evaluate how the REIT indexes fared against the wider stock market by comparing them against the Straits Times Index (STI) and Hang Seng Index (HSI).
In both cases, we observe that REITs experience wider swings than the market index.
The respective REIT indexes generally outclassed STI and HSI during good times but also registered larger losses during downturns.
This implies higher volatility if you only hold REITs compared to owning the market index.
One reason is that STI and HSI have constituents that span across different sectors.
Some of these sectors provide positive returns during economic expansion while others register losses.
Therefore, as the economy moves through various business cycles over a longer period, outperformers will negate the losses of weaker performers, reducing both returns and volatility.
A good way for investors to include a combination of SREITs and HKREITs in their portfolio is to buy an exchange traded fund (ETF).
When selecting ETFs, it is important to look out for certain information.
The first is the expense ratio, which is a fee charged by ETFs for managing the fund.
This fee reduces investors’ returns.
Within the SREIT ETF selection, expense ratios range from a low of 0.6% such as those charged by Lion-Phillip S-REIT ETF (SGX: CLR), to a high of 1.1% if you were to buy the UOB Asia Pacific Green REIT ETF (SGX: GRN).
While lower expense ratios are preferred, other fund information should be considered as well.
Secondly, investors can look at the geographical breakdown of an ETF.
These funds can hold purely SREITs like those offered by CSOP iEdge S-REIT Leaders ETF (SGX: SRT).
Alternatively, funds can be composed of REITs from multiple countries such as Singapore, Hong Kong, Japan, and Australia.
An example of a REIT ETF that allows country diversification is the UOB Asia Pacific Green REIT ETF.
While its higher fee may discourage some investors, the diversification benefits offered could justify the higher expense ratio.
Investors with a preference for HKREITs may consider the ChinaAMC MSCI Asia Pacific Real Estate ETF (SEHK: 3121), which allocates 45% of its holdings to HKREITs.
The fund also holds securities from other countries such as Mainland China, Australia, and Japan.
Having securities dispersed over more countries diminishes country risk as policies that work against properties in one country may be beneficial to REITs in another country.
Dividend yield and frequency
Thirdly, given the income generating nature of REITs, investors should naturally be concerned with the dividend yield of REIT ETFs.
Dividend yield is calculated by dividing the dividend per share by the share price.
They typically range slightly above 5%, although there are ETFs with yields hovering between 3% to 4%, such as the Phillip SGX APAC Dividend Leaders REIT ETF.
Distribution frequency is often looked at in conjunction with dividend yield.
For instance, even though the CSOP iEdge S-REIT Leaders ETF has a yield spread of 0.3% over the NikkoAM – Straits Trading Asia Ex Japan REIT ETF (SGX: CFA), the former pays semi-annually while the latter does so quarterly.
Investors that rely heavily on passive income may prefer more frequent distributions.
Beyond the fund information, investors should also think about how regulations will impact returns.
China’s abandonment of its zero-COVID policy and border reopening will affect SREITs and HKREITs differently.
For instance, the influx of Chinese tourists into Singapore could benefit retail and hospitality SREITs due to an increase in shopper traffic and hotel occupancy rates.
Strict zero-COVID policies may have triggered many businesses and expatriates to leave Hong Kong for good.
This exodus will have negative implications for HKREITs but should benefit SREITs over time.
Get Smart: A holistic analysis of REITs
There are various ways to compare the suitability of SREITs and HKREITs.
One method is to first formulate a view on the macroeconomic effect of government policies before cherry picking your preferred REITs based on risk appetite.
Other investors may be inclined to first screen ETFs based on fund characteristics like those discussed above, before further narrowing their list of ETFs based on government policies.
Regardless of the option you select, it should be tailored to your comfort and risk levels and also be aligned with your investment objectives.
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Disclosure: Tan Ke Xuan does not own shares in any of the indexes mentioned.