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A Resilient REITs Model - Beating the SG REITs Benchmark

REITS is one of Singaporeans' favorites when it comes to investments. It is highly regarded as a go-to asset class for building a retirement portfolio. That is primarily because of its association with real estate, an asset class Singaporeans loved, and its high dividend yields. As of October 2023, the average dividend yield for S-REITs is an impressive 7.7%.

Many individuals view REIT's alluring dividends as a reliable source of passive income to finance their retirement needs. However, dividends are not the same as coupon or interest payments from bonds or other debt instruments and it is just part of the whole picture. A more rational and complete approach is to look at the total return you get from both capital appreciation and dividends. Because if cash distributions are what you are after, you can always sell down your portfolio to create your own stream of "dividends".

Singapore REITs underperformed the broader stock market since Covid-19

Despite its widespread appeal, REITS is not all a bed of roses. It comes with its fair share of ups and downs and is not any less risky than stocks in general. Notably, Singapore REITs experienced a substantial decline of more than 25% during the Covid-19 pandemic episode in 2020. While it did rebound in line with the rest of the markets thereafter, the progress was unfortunately derailed as central banks worldwide kept on increasing the interest rates in a bid to bring runaway inflation under control in recent years.

At the point of writing, the 10-year and 20-year US Treasury yield stands at 4.67% and 4.99% respectively (source: US Department of the Treasury). The 30-year fixed-rate mortgage in the US has also already hit 7.76% (source: FRED Economic Data) surpassing pre-Great Financial Crisis (GFC) levels.

Based on the performance of the S&P SG REIT Total Return Index¹, the Singapore REIT market as a whole still lags, remaining 25.5% below its level prior to Covid-19. To put it in another way, it has virtually given back all the progress it made recovering from the Covid-19 bottom. This stands in stark contrast to the broader Singapore stock market as represented by STI ETF (Ticker: ES3.SI)² which is only down 7.4% over the same period.

¹ S&P SG REIT Index is an SGD-based index comprised of Singapore domiciles REITS and its performance includes both capital appreciation and dividends.

² The performance of the ETF includes both capital appreciation and dividends.

S&P SG REIT Index Performance Since Covid-19
S&P SG REIT Index Performance Since Covid-19

REITS still has a lead if we start in 2013

Before the onset of Covid-19, REITs enjoyed a remarkable run from 2013. That is as far back as downloadable data for the S&P SG Reit Index stretches. They had outpaced the STI by a wide margin of 60% before Covid-19 landed. However, this lead has narrowed significantly now to just 8%.

S&P SG REIT INDEX VS STI ETF (2013 - 2023)
S&P SG REIT INDEX VS STI ETF (2013 - 2023)

Managing a REIT portfolio in a more resilient way

So is there an alternative way to manage a REIT portfolio in a more resilient way? We developed an AQ SG REIT Model which is a part of the Singapore Stock Model we introduced in an earlier post. This REIT model featured the following:

1️⃣ Fully systematic - runs entirely based on predefined rules and quantitative factors.

2️⃣ REIT rotation - rotate across different REITs on a monthly basis using a scoring approach among a basket of SGD-based REITs (the basket is selected based on their size, liquidity, and availability of historical data).

3️⃣Defensive mechanism - shifts into cash or cash-equivalent securities during times of stress to lower the portfolio risk.

Based on the model portfolio's performance in a backtest running from the same period from 2013-2023, this is how it fared against the S&P SG REIT Index and the STI ETF.


Note: The model performances are calculated from monthly data. No leverage is used and the model assumes a 0.1% transaction cost in terms of commissions and slippage per trade.

The combination of a scoring approach to select suitable REITs for investments and the defensive mechanism to derisk and shift funds into cash during harsh times helps to improve the overall performance. Overall, it delivers a better CAGR using a lower level of risk (Volatility) and weather through the tougher periods with a lower drawdown.

Litmus Test - How does it hold up during the Great Financial Crisis?

While there have been some challenging times from 2013 - 2023, none comes close to the severity of the Great Financial Crisis in 2008 in terms of the damages it unleashed. In particular, REITs were mercilessly pummelled as mortgage-based assets were at the epicenter of the crisis. US REITs plummeted more than 70% during that tumultuous period.

Unfortunately, both the S&P SG REIT Index and some of the components used in our REIT basket lack data that extend that far back into history. So what we did was create a synthetic index comprising equal weighted REITs used in our basket as a comparison against our model portfolio. For lack of a better name, I am just going to call this synthetic index the Equal Weighted Basket. With this setup, we are able to go as far back as June 2008. And here are the results.


The AQ SG REIT Model held up far better than the Equal Weighted Basket. In fact, it weathered through the Lehman Brothers crisis in 2008 (the worst period during GFC) better than it did Covid-19. At its worst point during the GFC, the AQ SG REIT Model was only down 15.3% while the Equal Weighted Basket did much worse losing a substantial 55% from its high. If we also look across the entire period spanning 2008 to 2023, the AQ SG REIT Model delivered twice the CAGR at lower risk. Its Sharpe ratio is 2.5x that of the Equal Weighted Basket highlighting its superior risk-adjusted performance.

REITS will remain an important asset class

Even though REITs' performance has been lackluster in recent years, it will still remain an important asset class that many will include as part of their overall portfolio. Nevertheless, implementing a good and sound strategy to enhance its performance and mitigate its risk can go a long way in helping one build a more stable and dependable retirement nest egg.


Let's meet for breakfast!

As part of our free financial education series, we are organizing a casual breakfast session for those who've expressed that you'd like to learn more about the markets. We are also opening up this session to everyone who is keen to join us. Have some fun over a mini stock trading game, and learn about asset allocation and the 3 wants - Protection, Income, and Growth!

11 November 2023 (Saturday)

10:00 am to 11:30 am

10 Collyer Quay

Ocean Financial Centre

Singapore 049315

If you are interested, please RSVP using the button below! See you there!

Disclaimer & Disclosure

We are not financial advisers or fund managers. The information published on this Site is provided for informational purposes only. It is not intended to be, nor shall it be construed as, financial advice, an offer, or a solicitation of an offer, to buy or sell an interest in any investment product. Nothing on this site constitutes accounting, regulatory, tax, or other advice.

Any performance shown on this Site is model performance and is not necessarily indicative nor a guarantee of future performance. You should make your own assessment of the relevance, accuracy, and adequacy of the information contained on this Site and consult your independent advisers where necessary.

AllQuant is carrying out introducing activities for iFAST Global Markets (Singapore) as an independent entity and is NOT an agent, servant, employee, representative, or in partnership with iFAST Global Markets (Singapore). AllQuant will be receiving remuneration or introducing fees from iFAST Global Markets (Singapore).

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