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

Why real estate funds make good long-term investments

Updated
2
Sep 2022
published
10
Dec 2021
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investing in property funds and unit trusts

Real estate investment was once considered an alternative investment with a huge capital outlay required, and therefore only available to the ultra-rich.

Although owning multiple investment properties directly is still out of reach for most individuals, more real estate funds and real estate investment trusts (Reits) are now available, providing avenues for everyone to invest the sector.

Why real estate investing complements stocks and bonds

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

When the economy is booming, equities tend to perform 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 greater diversification for your overall portfolio.

15-year correlation to other real and financial assets

Types of property 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.

Units of Reits can be traded on major stock exchanges, making them highly liquid. The portfolio of properties owned by the Reit is managed by the Reit manager, which is also responsible for growing rental income, paying out the Reit's dividends, and overseeing other operational matters.

Reits may have different investment mandates, which restrict them to only invest in real estate in certain geographies or property sectors, such as offices, hospitals, data centres, or shopping malls.

There are more than 40 Singapore-listed Reits (S-Reits) and property trusts. Some of the biggest S-Reits include CapitaLand Integrated Commercial Trust and Mapletree Pan Asia Commercial Trust.

Globally, popular Reits include Manhattan's largest office landlord, SL Green Realty Corp, and logistics real estate investor Prologis Inc. Both of these Reits are listed in New York.

Find out more about the different types of S-Reits, and why they are popular with Singapore investors.

Listed real estate companies

Investors can also choose to invest in the stocks of individual real estate companies, such as City Developments Limited (CDL) and CapitaLand Investment (CLI).

Unlike investing in Reits, buying shares of 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 offer as much diversification as fund investing does, but some investors prefer investing in companies they are familiar with, or have conviction in.

Reit exchange-traded funds (ETFs)

Reit ETFs invest their funds in Reit units and other derivatives, and track the performance of benchmark Reit indices.

They are usually more diversified than individual Reits, and invest across a diverse range of property types, sectors, and geographies.

The five S-Reit ETFs listed in Singapore are:

  • 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)
  • CSOP iEdge S-Reit Leaders ETF (SGX: SRT)
  • UOB APAC Green Reit ETF (SGX: GRN) (SGX: GRE)

Real estate mutual funds

In a real estate mutual fund (also known as unit trust in Singapore), the fund manager pools together investors' money to invest in the sector. This is similar to Reit ETFs.

Unlike investing in single real estate or real estate companies, the benefit of investing in a real estate fund is that 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 a benchmark.

Real estate mutual funds offer total return opportunities, including capital appreciation and income or 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 often requires a lot of capital. In contrast, investing in real estate funds allows smaller investors to invest in real estate at a much lower entry point — even 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.

Investing in a fund also allows you to participate in diverse property sectors, including non-residential real estate such as office buildings or malls, which you may not be able to purchase directly. This provides more variety than buying a single property.

Not directly owning real estate also means that you are not bogged down by landlord duties like looking for new tenants, chasing for rent, and 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 can in turn increase the value of real estate funds.

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

Read more: Being selective key to passive income amid high inflation

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 invest only in Singapore 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-Reit space is fairly narrow, constituting about 4% of the global Reit market, and the market capitalisation of S-Reits is relatively small when compared to those of other countries. These Reit 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 the performances of global and Singapore Reits, global Reits have historically outperformed S-Reit 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 that can outpace inflation.

Read more: How are global real estate and Reits faring amid inflation and growth concerns?

Generally, the average appreciation rate for real estate is 3% to 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, fuelling 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 — about 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 centres 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

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, best-in-class real estate funds, overseen by global leaders in real estate investing.

Each fund has their own characteristics and styles, and this portfolio is constructed by balancing a number of key considerations such as diversification, income, and growth opportunities.

For more details on the Endowus Global Real Estate Portfolio, its underlying funds, and who it would be suitable for, click here.

Real estate can make up the smaller, satellite portions of your total portfolio. This will then complement the largest or core component, which should represent your strategic asset allocation. Learn how to approach a core-satellite investment strategy.

To get started with Endowus, click here.

Next on the Endowus Fin.Lit Academy

Read the next article in the curriculum: Learn about the Endowus Income Portfolios

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