Singapore may see more REIT-derived products as investors seek diversity

Singapore, already an attractive listing destination for real estate investment trusts, is becoming a regional hub for products built around REITs as the market matures and investors seek to diversify their holdings, analysts say.

Three REIT-focused exchange-traded funds have launched in Singapore in recent years and Singapore Exchange launched two international REIT futures in August 2020. REIT-focused robo-advisers, or digital platforms that use algorithms to invest and manage funds, have started attracting customers. Analysts predict that more of these products will become available as the economy recovers from the COVID-19 pandemic and businesses return to normal.

"This is a sign of a maturing market. As the REIT sector grows over a period of time, we expect more such instruments like ETFs and futures products [to be launched], and robo-advisers to get bigger," said Vijay Natarajan, a Singapore-based analyst at Malaysia's RHB Bank.

According to Natarajan, products like futures contracts and ETFs, or services like robo-advisers, provide various options for different kinds of investors who want exposure to Singapore's growing REIT segment.

"I would expect more of these three things, rather than a new, different product," he added.

Sophisticated market

These financial products provide investors portfolio diversification and relieve them of the periodic decisions that they would have to make based on corporate actions, said Nupur Joshi, chief executive of the REIT Association of Singapore, an industry lobby group.

"It is a sign of the growing sophistication of the market and of the interest shown by international investors in Singapore," Joshi said.

Singapore has positioned itself as an international REIT hub, leveraging its stable government and currency, and a strong regulatory environment. The country also offers a friendly tax regime and is seeking to become a wealth management center, all of which is helping create REIT-based products.

After CapitaLand Integrated Commercial Trust, previously known as CapitaLand Mall Trust, became the first REIT to list in Singapore in 2002, the market has grown at the fastest pace in the Asia-Pacific region, according to a report by Donnelley Financial Solutions, a global risk compliance solutions company. More than 40 REITs have listed in the city-state, with their combined market capitalization topping S$100 billion. REITs with a wide variety of assets from office spaces to warehouses in geographies including the U.S., Europe and Australia, have listed in Singapore. That range is a prime attraction for global investor interest in Singapore-listed REITs, according to the report.

After a crash due to the pandemic, Singapore's REITs have recovered faster and continue to offer better returns than their global peers. Stronger balance sheets of local REITs and the government's stimulus package for tenants to aid economic recovery have also helped. In the last five years, the S&P Singapore REIT index has gained nearly 60%, compared with a 40% increase in the S&P Global REIT index, a comprehensive benchmark of publicly traded equity REITs listed in both developed and emerging markets.

Stability in diversity

Diversity in geography or asset classes "tend to increase the stability of cash flows and therefore, the stability of distributions to investors," Joshi said. She expects more REITs to launch IPOs in Singapore as the sector offers "an attractive" yield spread of around 350 basis points over local 10-year benchmark government bonds.

The aggregate assets of the three ETFs built on REITs that have been listed in Singapore are estimated to be under S$1 billion, according to diversified financial services company Jefferies. "But, we think with ample marketing, superior cost-adjusted performance and a favorable macro environment, assets with flow through," said Krishna Jyoti Guha, an analyst at Jefferies.

Though fund-of-fund products have been available in the market for a while, Guha said "with a surfeit of green loans, ESG [environmental, social and governance] indices and REITs embarking on sustainability initiatives, we think new wrappers and derivative products linked to sustainability should also come to the market."

As the assets under management of these products grow, the improved cost of capital will result in higher distributions for investors, he said.

Syfe, a Monetary Authority of Singapore-licensed digital wealth manager, is among the companies hoping to capitalize on the demand for alternative REIT investments. It offers robo wealth-advisory services for investing in a basket of REITs and other securities.

Richard Yeh, the head of portfolio construction and risk management at Syfe, said the company has seen "huge interest" in the REIT-focused investment portfolio, which has amassed the third largest AUM among all ETFs available in Singapore within three months since its launch. He added that "Singapore's established infrastructure, developed REIT ecosystem, as well as its forward-looking and progressive regulatory market, will continue to position Singapore as a REIT hub."

As of July 6, US$1 was equivalent to S$1.35.