Why real estate funds make good long-term investments
Endowus Insights

Why real estate funds make good long-term investments

August 8, 2022
December 10, 2021

Real estate investment was once considered an alternative investment with huge capital outlay, and therefore only available to the ultra-rich. While owning multiple investment properties directly is still out of reach for most people, there are more avenues for everyone to invest in real estate through real estate funds and real estate investment trusts (REITs).

Why real estate investing is an attractive complement to stocks and bonds

As shown below, there is typically little or negative correlation between real estate, stocks, and bonds. Investing in real estate on top of equities and fixed income can reduce your risk exposure.

When the economy is booming, equities are performing well in comparison to bonds and real estate. However, during a bear market in stocks, other assets such as bonds and real estate might produce above average returns.

Investing in real estate has the potential to offer lower risk, higher returns, and provide greater diversification.

15-year correlation to other real and financial assets

Types of real estate investments available

Real estate investment trusts (REITs)

REITs are corporations that invest directly in income-generating real estate. In Singapore, they are required to pay 90% of their taxable income to investors each year, and hence can provide more income to investors. REITs can be traded on major exchanges, making them highly liquid. The REIT managers manage the portfolio of real estate, take care of growing rental income, pay out the REIT’s dividends, and oversee other operational matters.

These REITs may have different investment mandates, restricting them to only invest in property in certain geographies or property sectors (such as hospitals, data centres, and shopping malls).

Singapore currently has 42 Singapore REITs (S-REITs) and property trusts. Popular examples include the Ascendas Real Estate Investment Trust (AREIT) and Mapletree Commercial Trust (MCT). Popular global REITs include Prologis Inc and SL Green Realty Corp.

Listed real estate companies

Investors can also choose to invest in individual real estate companies, such as City Developments Limited or CapitaLand Investment. Unlike investing in REITs, investing in listed real estate companies means that you may own a business that is involved in property development, facility management, or even real estate fund management.

Investing in individual stocks may not allow for diversification like investing in other funds, but some investors may prefer investing in companies they are familiar with, or have conviction in.

REIT exchange traded funds (ETFs)

REIT ETFs invest their funds in REIT securities and other derivatives, and track the performance of benchmark REIT indexes. They are usually more diversified than individual REITs, and invest across a diverse range of property types, sectors, and geographies.

The 5 S-REIT ETFs listed in Singapore are the Phillip SGX APAC Dividend Leaders REIT ETF (SGX: BYJ) (SGX: BYI), NikkoAM-StraitsTrading Asia Ex Japan REIT ETF (SGX: CFA) (SGX: COI), Lion-Phillip S-REIT ETF (SGX: CLR), the newly listed CSOP iEdge S-REIT Leaders ETF (SGX: SRT), and the UOB APAC Green REIT ETF.

Real Estate mutual funds

In a real estate mutual fund or unit trust, similar to REIT ETFs, the fund manager pools together investors’ money to invest in the sector. Unlike investing in single real estate or real estate companies, the benefit of investing in a real estate fund is it is professionally managed and offers greater diversification. They can also be actively or passively managed. Passively managed funds typically track the performance of a benchmark index, such as the iEdge S-REIT Leaders Index. In an actively managed fund, the fund manager has the discretion to pick individual real estate companies and REITs in order to outperform their benchmark.

Real estate mutual funds offer total return opportunities, including capital appreciation and income/dividends. They do not trade like stocks, and their prices are only updated once a day.

Why should you invest in real estate funds?

Professionally managed investment exposure

Individual investors can benefit from having an experienced fund manager help them manage their portfolios. For investors who are not familiar with the real estate industry, or lack the time to do their own research, relying on experts can be both cost and time efficient.

Alternative investment to purchasing a property

Purchasing real estate directly would require a lot of capital. Investing in real estate funds allows small investors to invest in real estate at a much lower entry point, as low as $100. This also means that you can enjoy more liquidity, instead of having a large sum of your money locked up in a property.

Instead of just purchasing one property, you can invest in diverse property types, such as non-residential properties (e.g., malls or office buildings), that you cannot directly purchase.

Not directly owning real estate also means that you are not bogged down by landlord duties such as chasing for rent or maintenance upkeep.

Portfolio Diversification

Since real estate is a different asset class from stocks and bonds, adding real estate funds to your investment portfolio can help you diversify your portfolio. It can also protect you against inflation and volatility. During inflation, the prices of property and rent are likely to increase, which in turn can increase the value of real estate funds.

Real estate funds can also act as a volatility hedge and stabilise your portfolio, with its low correlation with stocks and bonds indices.

Passive income and dividend yield

Many real estate funds provide regular payouts in the form of dividends. Cash flows in the form of dividends can allow investors to earn regular passive income.

Should you only invest in Singapore real estate funds?

Investors may have the tendency to favour investing in local real estate funds due to home bias. However, investing only in Singapore real estate funds may not be beneficial.

The S-REITs space is fairly narrow, constituting only ~4% of the global REITs market, and the market capitalisation of S-REITs is relatively small when compared to that of other countries. These ETFs are also narrowly focused on either Asia or Singapore. Over-allocating to S-REITs may subject local investors to concentrated regional risks.

Comparing REIT investment options performance

Comparing global and local REITs performances, global REITs have historically outperformed S-REITs portfolios. It would be worthwhile for local investors to diversify away from home bias by investing in a globally diversified portfolio.

Why do real estate funds make good long-term investments?

Real asset securities have historically offered attractive income with growth

Real estate has historically offered attractive returns relative to other yield sources. Real estate funds are pro-cyclical, and tend to correlate with economic growth. Property owners can pass on higher costs in the long run to tenants, thus allowing for a sustainable long term growth above inflation. Generally, the average appreciation rate for real estate is 3 - 5%, which means that in the long run, real estate funds will grow in value, thus paying out higher dividend yields.

Looking toward longer-term patterns, the Covid-19 pandemic has accelerated trends in e-commerce, fueling extremely strong demand for modern logistics spaces. With more people globally turning to online shopping, the demand for such logistics spaces will only increase in the future.

There has also been strong rental growth over the past few years, but rent expense only remains a small portion – 5% – of the total supply chain cost. This leaves plenty of room for rental growth, particularly since demand for property is stronger than ever.

Technological advances have also driven the explosion of data, creating the need for new assets like data centers and cell towers. The acceleration of data usage due to the pandemic, with more people working from home and engaging in online activities, has led to a large uptick in demand for real estate space in these sectors.

Invest in expertly curated real estate unit trusts with Endowus

The Endowus Global Real Estate Portfolio is designed to help you own global real estate and infrastructure assets.It is made up of four actively managed real estate funds, overseen by global leaders in real estate investing.

Learn more about investing in real estate with the Endowus Global Real Estate Portfolio.


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