Reits: Does Diversification Work?

There are many people who seem to believe that in investment, it is important to diversify. However, what does diversification mean and how diversified should one be? To answer this will require an analysis across many different asset classes and will be the topic of a major post. Instead, in this short post, we will be looking at whether you should or should not diversify your REIT Investments.

Suppose you have a $100 k pool of savings that you will like to invest in REITs. Having read that you should diversify your assets, you have decided to only put 20% in this asset class. However, how should you position yourself? There are many Reits to choose from, from Capitaland Mall Trust to Mapletree Industrial Trust to Capitaland Commercial Trust and many more. Should you split your money amongst the different REITs? Should you stuff everything into the Singapore Reit with the Highest Dividend Yield?

Those who have done a little statistics in the past will go back to yahoo finance and pull out the following Chart. What this basically shows is that in terms of capital appreciation, it does not matter whether you buy into Capitaland Commercial Trust or Mapletree Industrial Trust. Of course there is always the question of how high the dividend yield is but the basic conclusion remains: the share price of Capitaland Commercial Trust and Mapletree Industrial Trust over the last 5 years appear so correlated there seems to be totally no diversification benefit if you have bought into both of these Reits. 

Capitaland Commercial Trust Share Price V.S Mapletree Industrial Trust Share Price

However, one should not just look at the share price to determine if there was benefit in buying into the two reits and thus attain a degree of diversification. Instead it is important to look at what the purpose of diversification is. The main aim of diversification is to achieve capital protection, a main goal when we look at how and where to invest money in Singapore. Mapletree Industrial Trust is mainly in the Industrial Space while Capitaland Commercial Trust is mainly in Grade A Office Properties. Both of these have their own Sub Sector Demand and Supply Dynamics. What if industrial property outlook is not as bright as office property outlook? Though diversification, we aim to preserve capital by avoiding situations where we can be totally and complete ruined.

Hence, in our humble opinion, there is no harm in diversifying into the different Reits even if they have similar capital appreciation trends. The fact that something did not happen does not mean it was foolish to keep a look out for it. That said, there are different type of diversification and the sub sector diversification that we cover today is not the one and only strategy. Tilll next time.

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