Deep Dive: Endowus Global Real Estate Portfolio

What is the Endowus Global Real Estate Portfolio?

The Endowus Global Real Estate Portfolio ("Portfolio") provides investors with access to opportunities in the global real estate and infrastructure markets. The total return of the Portfolio consists of dividends and long term capital appreciation. Taking into consideration diversification, income and growth opportunities, it presents investors with an attractive current underlying dividend yield of 4-6% per annum and long-term capital appreciation potential.

The Portfolio therefore offers indirect exposure to the underlying physical assets owned by these companies.  Listed real estate companies own, finance, or develop income-producing physical properties, such as retail shopping malls, office buildings, and logistic warehouses. They are managed by either Real Estate Investment Trusts (REITs) or property developers, with the former being the majority within this universe. In a similar vein, listed infrastructure companies own and operate infrastructure assets such as energy grids, toll roads, railways and pipelines.

Real estate and infrastructure companies form a meaningful part of the real asset equities universe and can play an important role in an investor’s total portfolio.

What is Endowus Global Real Estate Portfolio made of?

The Portfolio is a curated portfolio of four funds managed by professional fund managers who are experts in Real Estate and Infrastructure investing. They are well known global investors (BlackRock, Janus Henderson and UOB Asset Management) with extensive experience and expertise investing in this space. Each fund has their own characteristics and styles, and the Portfolio is constructed by balancing a number of key considerations such as diversification, income, and growth opportunities.

The four funds chosen complement each other and offer investors a well-diversified and optimal exposure to the global real estate and infrastructure market. The table below summarises the key features and underlying characteristics that differentiate each of these underlying funds and the areas of specialisation. It is these diverse characteristics of the funds that come together and create a diversified and optimised portfolio increasing the opportunities to generate returns for investors.  

Why invest in Real Estate and infrastructure?

Supported by consistently high dividend yield with long term capital appreciation potential

One of the biggest attractions of investing in listed real estate and infrastructure is the ability to access income-generating assets in a liquid and transparent manner, and provide returns  through the dividends they pay  Given that these companies generally own physical assets that produce stable cash flows from sources like rental income and utility bills, they have more stable cash flows and profitability and hence are able to deliver higher and more predictable dividends  than other companies. The high level and the stability of dividends for many real estate companies are further underpinned by the legal design of REITs as REITs are required by law to pay out the majority of their taxable income as dividends.  

As shown by the below chart, historically, global listed real estate and infrastructure companies have had consistently higher dividend yields compared to that of the broader developed equity market and the yield of the 10-year US government bond.

Not only benefiting from consistently high dividend yield, investing in this asset class can also give investors potential long term capital appreciation. This is contrary to the otherwise “bond-like” perception which many still hold on this sector, but in particular global real estate and infrastructure has delivered good capital appreciation over time.

The below chart compares the growth of wealth of listed real estate and infrastructure to that of the two high-yielding fixed income sectors over the past ten years, and the former has generated stronger total returns and upside than the latter.

By investing in the stocks of listed real estate and infrastructure companies, investors have the opportunity to  share in the future profits, and hence the growth potential, of these companies. Moreover, the industry is rapidly evolving and growing, and long-term secular trends like 5G, e-commerce, aging population, and climate change all have profound impact on the development of both sectors, accelerating the growth of some segments such as data centres, logistics warehouses and elderly homes.

Diversification benefits

Due to the relatively low correlation to other asset classes, allocating to listed real estate and infrastructure companies as part of an investor’s overall portfolio will allow one to enjoy better risk-adjusted returns due to the benefits of diversification.

This diversification benefit can be seen in the chart below: it provides evidence of the low correlation between both assets and other real assets (e.g. gold and oil) and financial assets (e.g. bonds and equities).

Potential inflation hedging capability

Having part of one’s allocation in real estate and infrastructure companies can also provide potential for hedging against rising inflation.  Broadly speaking, these real assets have outperformed the global bond and equity markets during inflationary periods as seen in the table below. It has the best of both worlds in protecting capital and generating good yield from the underlying asset on the one hand, and growing long term capital that hedges against any inflationary concerns.

In a nutshell, investing in real estate and infrastructure companies offer an effective hedge against inflation because many of them enjoy strong pricing power or even explicit long term pricing contracts to pass the impact of rising prices to their customers. This is a key factor in the ability to maintain and generate good income to be paid out to investors.

Property developers can increase the price of new properties due to rising cost of labour and materials. On the other hand, the rising costs of new developments limit new supply to the market, which in turn gives landlords pricing power to raise rents to tenants. Furthermore, some commercial leases have rent escalation clauses tied to inflation, granting automatic rent increase in inflationary periods.

For listed infrastructure companies, a study has shown that more than  70% of assets owned by listed infrastructure companies have effective means to pass-through the impact of inflation to customers. Most infrastructure assets have an explicit link to inflation through regulation, concession agreements or contracts. Other assets without an explicit link often have the pricing power to deliver a similar (or better) outcome reflecting their strong strategic position.  

That said, significant qualitative assessment is still required to identify companies that offer stronger inflation protection in both sectors, underlining the importance of active management in both sectors.

Who should invest in listed real estate and infrastructure?

While the aforementioned benefits make listed real estate and infrastructure a desirable allocation for investors who seek high dividend yield, long term capital appreciation and inflation protection, it is important to rightly understand the volatility and downside risk of such investments.

The memory of the global financial crisis (GFC) in 2008-2009, and more recently the Covid sell-off in March 2020 still stays with many of us. In both periods, real estate and infrastructure sectors were hit hard and suffered large drawdowns, not to mention that the global financial crisis itself was a sequel of the burst of the US housing bubble. Looking at the scale, real estate equities lost up to 65% from their peak value during GFC, and 26% during the Covid sell-off. These numbers are largely in line with broad market returns but worse in GFC as that was a housing crisis and less in the March 2020 Covid sell-off. In comparison, infrastructure equities were more resilient during both periods, despite still suffering 32% peak-to-trough loss in GFC and 16% during the Covid sell-off.

However, a longer investment horizon would help to lessen the significance of short term fluctuations. Therefore, investors who are prepared to withstand the short term volatility described above and have a mid-to-long term investment horizon would be most suited to invest in listed real estate and infrastructure sectors.

Why should you invest in Endowus Global Real Estate Portfolio?

Break away from home-bias and seek global exposure

When it comes to real estate investing, the first thing that comes to mind for many local investors are Singapore REITs.  While it is true that Singapore has the second largest REIT market in Asia, offering investors various opportunities, it only constitutes less than 4% of the global listed real estate market. Investing purely in Singapore REITs depicts a common investment mistake in behavioral finance, which is the bias towards over-allocating to one’s home country, also known as “home-bias”.

The global real estate market has a total market capitalisation of about USD 3.5 trillion and the size for global infrastructure market is above USD 1.8 trillion. The global opportunity set is vast and exciting, covering more than 700 companies in 38 countries and 23 sectors.

The Endowus Global Real Estate Portfolio helps local investors break away from home bias and access diversified opportunities globally.

Active management by fund managers to generate high income and capture growth

For specialised sectors such as real estate and infrastructure, we believe there are plenty of  alpha opportunities, and hence active fund managers can add material value compared to passive index exposure.

The underlying funds of the Portfolio are all actively managed by leading real estate investing experts at fund managers including BlackRock, Janus Henderson and UOB Asset Management, and the use of these active funds have allowed the Portfolio to achieve:  

1. a current dividend yield of 4-6% per year, which is higher than the 3% yield level of the global developed real estate and infrastructure markets
2. a higher historical annualised return than the global developed real estate and infrastructure markets, achieved  with relatively low volatility, as illustrated by the table below

These fund managers have deep understandings of the dynamics of real estate and infrastructure sub-sectors in each country and hence,  they are able to dynamically reposition the portfolio to better capture return and manage risk based on their views on dividend sustainability, future growth and short term dislocations.  

Ongoing assessment of underlying funds by Endowus Investment Office

The current underlying funds have been selected by Endowus to be the best-in-class against their peers after thorough due diligence. Endowus Investment Office continues to follow each fund’s performance, and portfolio activities and assess the fund’s quality against peers, as well as its suitability for the Portfolio. Endowus Investment Office also continues to research on new funds that can further add value to the Portfolio. This assessment helps to ensure that the Portfolio continues to be invested in the best-in-class managers and is responsive to ongoing developments/new ideas.

Learn more about how you should approach a Core-Satellite Portfolio investment strategy here.

Appendix: Portfolio Details

Portfolio Allocation and Cost

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