What are Real Estate Mutual Funds?
Real estate mutual funds, similar to other mutual funds, are a type of investment that cover a wide variety of asset classes to create a diversified portfolio.
Real estate mutual funds, similar to other mutual funds, are a type of investment that cover a wide variety of asset classes to create a diversified portfolio. These funds are managed by professionals who utilise a large portion of the capital collected from investors to invest in securities like stocks or bonds of real estate companies, including real estate investment trusts (REITs), or to purchase properties directly, such as commercial and corporate properties, residential complexes, and even agricultural land.
Investors purchase shares or units of mutual funds at a price depending on the fund's current net asset value. The net asset value is calculated once a day and is based on the closing prices of the securities in the fund's portfolio. This means that real estate mutual funds allow investors to profit during rising markets and time the liquidation of their funds. This form of investment would appeal to retail investors who are unable to invest in real estate directly, but prefer a diversified and expertly managed portfolio as well as a high level of liquidity.
The return of real estate mutual funds are affected by several factors, including but not limited to the conditions of the real estate market, residential and commercial vacancy rates. As a result, real estate mutual funds are exposed to market risks such as the COVID-19 pandemic crisis and its effects on the global real estate sector, as well as interest rate risks.
Read also: Implications of COVID-19 aftermath on real estate sectors
REITs
REITs operate as corporations or trusts that invest directly in real estate through physical properties or mortgages, and they are traded on the stock exchange in units. There are three main types of REITs:
- Equity REIT (invest in and own properties)
- Mortgage REIT (invest in mortgages)
- Hybrid REIT (a combination of the above)
REITs also vary in scope and can invest broadly with global assets in both established and emerging markets, while others tend to focus on specific sectors such as retail, residential, commercial, self-storage, telecommunications and even data centers. Depending on the jurisdiction, REITs have to pay out most, if not all their taxable income as dividends to unitholders in order to qualify as a REIT.
Read also: An overview of investing in REITs in Singapore
Differences between REITs and real estate mutual funds
REITs essentially mimic stocks and exchange traded funds, while real estate mutual funds mirror traditional mutual funds. Real estate mutual funds generally increase in value through asset appreciation and usually do not provide short-term income to investors as do REITs (in the form of dividends). Hence, real estate mutual funds are more attractive for buy-and-hold investors focused on long-term capital appreciation, while REITs are for investors seeking passive income.
Depending on the investment strategy adopted by the fund managers, real estate mutual funds can also be a more diversified investment vehicle than REITs, as they typically invest across multiple property sectors and geographies, providing a broad asset selection, compared to buying REIT stocks alone, which may individually specialise in certain sectors or geographic regions, and thus may not provide that degree of diversification investors are seeking. Mutual funds investors also have the flexibility to move from one fund to another, and incur lower transaction costs with greater diversification concentrated in one or a few funds, as compared to investing in different REITs.
Moreover, real estate mutual funds offer investors access to professional portfolio management and the analytical and research information provided by the fund. This includes details on acquired assets and management’s perspective on the viability and performance of specific real estate investments and as an asset class, which are information not normally available to REIT investors. However, this also means that mutual funds have higher expense ratios, as investors pay higher fees compared to REITs for the access to active management by specialists with dedicated real estate securities analyst teams.
Investors of real estate mutual funds possess less control over the portfolio than REIT unitholders. Unlike unitholders that are akin to owning stock in a company, mutual fund investors do not have voting privileges on the issues and management of the fund. The role of a mutual fund investor is greatly diminished compared to most other types of real estate investment.
When is a good time to invest in real estate mutual funds?
Many real estate mutual funds invest in a diverse portfolio of REITs, hence the performance of such mutual funds may be correlated to the performance of the underlying REITs.
REITs tend to perform best when interest rates are decreasing while rents are increasing. Capital market conditions, such as the institutional demand for equity REITs are also important, sometimes even overwhelming the REIT’s fundamentals. Identifying a growth trend for REITs and the overall real estate sector may be a positive indication for strong returns from the relevant real estate mutual funds.
In general, the presence of bull markets is usually a good sign to invest in real estate mutual funds. Prior research has shown that real estate mutual fund managers, for large funds with high turnover, expense ratios and cash holdings, exhibit positive timing ability in bull markets, but not in bear markets. However, even in tumultuous times such as the COVID-19 pandemic which devastated real estate markets, there may be opportunities to take advantage of undervalued prices for real estate mutual funds.
Read also: RealVantage's COVID-19 viewpoints and strategies
Examples of REITs and real estate mutual funds
An example of a real estate mutual fund is the Vanguard Real Estate Index Fund. The Vanguard Real Estate Index Fund is a mutual fund with a minimum initial investment of SGD3,000 and charges a 0.12% expense ratio. It is a broad REIT index fund weighted by market capitalisation and owns about 183 different REITs, giving investors exposure to all types of commercial real estate assets.
Some examples of REITs include the Suntec REIT, Ascott Residence Trust, Ascendas REIT, Keppel REIT and Sasseur REIT, all of which are listed on the Singapore Exchange.
About RealVantage
RealVantage is a leading real estate co-investment platform, licensed and regulated by the Monetary Authority of Singapore (MAS), that allows our investors to diversify across markets, overseas properties, sectors and investment strategies.
The team at RealVantage are highly qualified professionals who brings about a multi-disciplinary vision and approach in their respective fields towards business development, management, and client satisfaction. The team is led by distinguished Board of Advisors and advisory committee who provide cross-functional and multi-disciplinary expertise to the RealVantage team ranging from real estate, corporate finance, technology, venture capital, and startups growth. The team's philosophy, core values, and technological edge help clients build a diversified and high-performing real estate investment portfolio.
Get in touch with RealVantage today to see how they can help you in your real estate investment journey.
Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.