FSM Weekly Articles

Idea of the Week: Consider This Income-Generating REIT Fund [3 August 2012]

We look at the Phillip Singapore Real Estate Income fund as an alternative to buying physical property in Singapore

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  • Published on 03 Aug 2012

Idea of the Week: Consider This Income-Generating REIT Fund [3 August 2012] | Open a FREE FSM account and manage all your investments conveniently in ONE place

Idea of the Week: 4 ex-Recommended Funds You Shouldn’t Ignore – Part 2 [27 July 2012]

 

Most investors in Singapore consider physical property an essential asset class for investment, but purchasing a physical property comes with many drawbacks. These include a large amount required for down payments, worries over the potential rising of financing costs as well as wondering if the property they are eyeing is currently overpriced. On top of this, investors have to consider the real risk of additional residential property regulatory measures while commercial and industrial properties are typically inaccessible to retail investors.

In this week’s Idea of the Week segment, we highlight a new fund on the platform, the Phillip Singapore Real Estate Income fund, and see 3 reasons investors should consider the fund.

1. REIT Structure + Fund’s Intentions + Current Yields = Income Opportunity

The structure of a Real Estate Investment Trust (REIT) sees such financial products legally obligated to pay out 90% of all earnings to investors, with a maximum of 10% of earnings allocated to developing new property. With an underlying asset obligated to pay out 90% of earnings, the fund seeks to redistribute the income it earns to investors through regular quarterly payments.

With over 90% of earnings legally obligated to investors, investors seeking income could consider investing in REITs. On a year-to-date basis (as of 31 July 2012), the hunt for yield has grown, as evidenced by the Singapore REITs index’s outperformance of the broader STI, rising 28.3% as compared to the STI’s 15.4% rise. Nonetheless, with indicative yields continuing to remain favourable, hovering around the range of 7.7% for industrials, 6.5% for retail and 6.6% for commercial, investors seeking income should pay the REIT sector some serious consideration.

2. Diversified Holdings Across REIT Segments Provide Stability

Even though REITs in Singapore are relatively new, having been first introduced only in 2002, there are now over 23 REITs domestically. With different REITs focused on different sectors of the property market, investors would require a large sum of capital in order to successfully diversify away specific risks associated with the different property sectors, something which is not exactly realistic nor easily accomplished by most retail investors. However, one of the many benefits of a unit trust is the ability to pool together assets to gain access to other inaccessible assets or strategies, which is the case in point here as investors would be able to own a slice in each REIT the fund holds in its portfolio, which will range between 15-18 REITs. Thus, despite residential property regulatory measures which have perhaps capped investor interest in the sector due to more stringent rules, the fund offers investors exposure to the competitive commercial and industrial property sector as well.

A key benefit stemming from the diversification of the REITs in the portfolio is the provision to investors of diversification in terms of occupancy, type & quality of tenants as well as the length of rental agreements, key factors which affect a REIT’s quality. With a diversified range of REITs, the fund has the ability to benefit through moving into various property sectors at various stages of the economic cycle.

3. Income In A Period of Uncertain Capital Gains & Low Yields

In a time when capital gains are uncertain such as today, where many a wild swing can send investors scurrying to both ends of the risk-reward scale, many investors have taken to income generating or yield providing financial instruments and asset classes in an attempt to smooth out the volatility in today’s markets. This can be seen in the rush by investors towards fixed income and high dividend paying equities, as evidenced by the new lows in yields being set in US Treasuries on a regular basis in recent times, as well as the recent flood of bonds and perpetual securities from the likes of Genting and Olam for some quick and relatable examples.

Nonetheless, such yield-producing and income generating products typically come with high initial investment amounts and extremely high concentration risks which deter typical retail investors such as us. With yields hovering between 6-8% for Singapore REITs at large, the Phillips Real Estate Income Fund grants investors with access to a diversified and stable property portfolio in Singapore, at a low initial investment cost while seeking to generate a stable flow of income.

 

See Also:

Idea of the Week: 3 Recommended Funds You Haven’t Heard Of Yet [13 July 2012]  

Idea of the Week: 4 ex-Recommended Funds You Shouldn't Ignore - Part 1 [20 July 2012]

Idea of the Week: 4 ex-Recommended Funds You Shouldn't Ignore - Part 2 [27 July 2012]




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