In the News: ZDR Investments SG VCC in Singapore’s REIT Space

Joseph Ong, Executive Director and Co-Founder of Euro Asia Asset Management, and Fund Manager of ZDR Investments SG VCC, was invited to join Hongbin Zhang on MoneyFM 89.3 to discuss the Singapore REIT space.In the interview, Joseph explained why diversifying into different currencies and markets such as European real estate, represented by the ZDR Investments fund, can be a sound strategy.

So what are the promising or most promising sectors within REITs today?

Yes, given the current economic climate and expectations of easing interest rates, the more promising sectors that we have identified within REITs will still be the data center REITs. These are driven by accelerating AI, cloud computing and digitalization, leading to robust demand and continued strong rental growth for these sectors. Another sector that we actually point out will be healthcare REITs. These are very defensive and resilient. It benefits from inelastic demand due to the aging population and offers stable long-term income streams. One last interesting sector will be retail parks, which our fund, ZDR Investments, is focusing on.

So now, when we say retail parks, we are actually not talking about the traditional multi-storey shopping malls that face headwinds. We are referring to these convenience-led open-air retail parks anchored by essential services like supermarkets, pharmacies and discount retailers. These properties cater to daily necessities. They naturally benefit from consistent footfall and predictable rental income during economic downturns. We would say that this sector is especially promising to look at in view of the uncertainty in the macroeconomic environment brought by erratic trade policies.

So what are some of the trends in the REITs sector you are witnessing amongst investors? How are retail investors versus institutional investors adjusting their approach to REITs? Are there any differences?

Okay, so two parts to this question. Firstly, the trends in the REITs sector. We are still looking at the yield attractions. With interest rates easing off, REITs continue to appeal due to their relatively attractive dividend yields. Currently, we see around 6% to 7% for many, which is higher than alternative options like T-bills and savings bonds. This income-generating characteristic remains a key draw. And we are also looking at the trend of going on the valuation play. Many REITs are still trading at a discount to their NAV, suggesting a potential upside for investors who believe in the long-term value of the underlying assets. So it’s really to buy and hold and let the valuation play out in the long run. And on the second part of the question, you asked retail investors versus institutional investors. This is an interesting one. We are seeing retail investors and institutional investors naturally acting very differently. Retail investors are typically net buyers during weakness. They are more income-focused, less sensitive to short-term volatility. On the other hand, for institutional investors, we are seeing them as net sellers during weakness with selective re-entry. They focus very much on capital preservation, portfolio balancing, more than just chasing the income and yield. And they are more selective on sectors.

Well, speaking of trends here, Joseph, how are investors approaching diversification within a REIT portfolio to balance returns and risk then?

Yeah, I would say diversification is absolutely critical. Investors are looking beyond just having multiple REITs in their portfolio. One of the areas they’re looking at for diversifying is on the geography side. Geographic diversification, not just Singapore or even Asia, but spreading across different stable economies like Europe or specific regions within. So this actually helps to mitigate country-specific economic downturns. Another way to diversify would really be looking at sector diversification by blending exposure to different property types. While we see industrial and data centers being very popular, we are also seeing more recognition of diversifying into more defensive sectors like necessity-based retail or healthcare.

All right. So then, speaking of risks here, what are the key risks facing REITs in today’s market?

The key risk we observe today is still the same risk we have observed for the past 20 years. The same one like interest rate sensitivity. Higher rates increase borrowing costs and impact valuations, especially for higher-geared REITs. Another risk that we’re looking at is inflationary pressures. While, as mentioned, rents can rise, we’re also seeing increased operating costs eating into net operating income. So if these are not managed effectively, it actually reduces returns to the investors. On the economic side, on the macro side, we are identifying economic slowdown or recession as one of the key risks, which will impact tenant demand, occupancy rates and rental growth.

On that note, what tools or metrics should investors rely on when evaluating risk exposure across the REIT portfolio?

Okay, so for this, beyond the standard quantitative metrics like NAV and distribution per unit, our company also looks very much at the qualitative side of things. One of these metrics is the tenant quality and diversification of the tenant mix. Basically, this is to assess the creditworthiness of tenants and to ensure that there’s no over-reliance on any single tenant. We also do stress testing, running various stress scenarios such as interest rate hikes and economic slowdowns to see how the whole portfolio performs under adverse conditions. So taking on this forward-looking analysis is very crucial to ensure no blind spots are missed.

What are the main challenges in managing REIT investments across different jurisdictions?

Managing cross-border REIT investments definitely comes with its unique set of challenges. And there is typically a high barrier to entry that requires the expertise. Some of the hurdles we have to overcome include regulatory and legal complexity, with every country having their own property laws, tax regimes and operating regulations. So understanding and complying with these is very important. We’re also looking at tax implications as one of the challenges we need to overcome, where we have to manage the double taxation treaties and the local property taxes to optimize returns for investors. Lastly, on the local market cultures, real estate being a very tangible asset is inherently local. You do need strong on-the-ground teams to understand local demand drivers, tenant preferences and market dynamics.

And how do currency fluctuations impact cross-border REIT performance, and how do you hedge against that risk?

The impact from currency fluctuations when it comes to REITs comes from various angles. Namely, the translation risk where we see changes in NAV when foreign assets are converted to the home currency. We also see transaction risk where there’s a direct impact on rental income and expenses when foreign currency earnings are converted for distribution. So how REITs actually hedge against this is typically through natural hedging. They borrow in the same foreign currency as the income-generating assets to offset exposure. They can also use financial instruments such as forward contracts, currency options and currency swaps to lock in exchange rates for future income. But ultimately, while these hedging actions stabilize DPU and protect NAV from currency volatility, we see the downside where there’s a compromise in maximizing DPU. This is also the reason why our firm believes in managing our fund to invest in the single currency exposure, removing the downsides of hedging while still allowing investors to take on the euro as a diversification for their own portfolio.

Overall, what advice would you give to new entrants in the REIT market about navigating compliance risks?

My advice would be really to do your due diligence well. You must understand the regulatory framework of both the funds themselves and the target property markets before you commit. You need to really build a strong team or at least partner with professionals who have the knowledge of both real estate and regulatory compliance. And staying updated with the regulatory landscape is very important. There’s a need for constant monitoring and adaptation.

Joseph, I believe you also started your own REIT fund here. Tell us more about your fund. How does it differentiate itself from existing REIT funds in terms of strategy or focus?

Yes, that’s right. We launched ZDR Investments SG VCC, which is a Singapore variable company structured fund. Our key focus is on investing in resilient retail parks across Europe. How we differentiate ourselves is through a very deliberate strategy. We have a very niche focus with the expertise. While you see some funds diversified across different sectors, we are specializing in a single proven asset class, that is, European retail parks. We have deep sector-specific knowledge and on-the-ground presence. This allows us to do very focused due diligence and value creation. At the same time, we are able to deliver recession-resistant income. We prioritize properties anchored by essential retailers, ensuring stable and predictable rental income that can hold up even during economic downturns. So this is a significant differentiator from traditional discretionary retail.

How does your fund adapt to market volatility or economic uncertainty?

Our fund strategy, as mentioned, is inherently designed to adapt to market volatility and economic uncertainty. Precisely the reason why we chose retail parks as our main assets. Our tenants are selling essential goods and services. They are largely immune to economic cycles. During economic downturns, people still need groceries, medicines, basic home supplies. So this actually creates a very stable income stream, making our properties less vulnerable to rent declines or vacancies. Our leases are also signed for a good period of over 7 to 10 years with inflation-linked clauses to ensure inflation is covered for. So with a long weighted average lease expiry, we are actually able to weather short to medium-term volatility with ease.

Overall, Joseph, what trends in the REIT space are you most excited about, and how will your fund capitalize on them?

Yeah, we are actually very excited about two key trends. Number one, the return to search for safe and stable corporate yields with easing interest rates. Investors, having benefited from risk-free assets with interest rates such as Singapore T-bills hitting as high as 4.4%, are now back to searching for safe corporate yields. So I think the REIT space is definitely going to benefit from such a trend.

Second key trend that we’re looking at is the flight to safe quality and resilience. With the uncertainty in macro policies and the economic environment, investors are increasingly looking for safe assets with a decent enough yield to park their cash in. Investors are also increasingly discerning. They are moving away from speculative plays towards tangible assets with proven benefits and income stability.

So our fund’s focus on necessity-based European retail parks directly capitalizes on this, offering a stable income profile that resonates deeply with investors.