Diversification in REIT Investing: How It Is Done Properly In Singapore

Daniel Lee

4 hours ago6 min read

Diversification is often touted as one of the most effective ways to reduce risk in any investment portfolio. When it comes to Real Estate Investment Trusts (REITs), diversification is just as important—but many investors overlook the nuances of doing it correctly.

While a larger number of REITs in your portfolio may provide variety, true diversification involves more than just quantity. (The more ain’t marrier for diversification)

In the Singapore market, where REITs span multiple sectors and countries, achieving proper diversification requires understanding and managing exposure across sectors and geographical regions.

In this article, I’ll go through:

The two methods of diversification
The problem investors face diversifying using Singapore-listed REITs
The solution to achieve effective diversification

Two Methods Of Diversification

Similar to all other asset classes and instruments, there are two essential methods of diversification for REITs: diversification via sector or diversification by geography.

Sector Based Diversification

REITs invest in a wide range of property sectors, each with unique drivers and risks.

By diversifying across sectors, you can reduce reliance on any single property type and enhance the resilience of your portfolio against sector-specific downturns.

Understanding Key REIT Sectors: In Singapore, REITs are available across diverse sectors - including industrial, retail, office, healthcare and hospitality. Each sector behaves differently depending on economic conditions. For instance, retail REITs can be more sensitive to consumer demand, while healthcare REITs often offer stability due to consistent demand for medical services.
Understanding Correlations: Some sectors are more correlated with each other, while others can provide a balance against each other. For example, logistical industrial properties may have a high correlation rate and behave similarly to retail properties. On the other hand, the same logistical properties may have a low correlation rate and behave differently from data centres or offices given the difference in the underlying tenant base.

A balanced allocation across multiple sectors can help insulate your portfolio from sector-specific downturns. For instance, if you hold a mix of healthcare and office REITs, a dip in office occupancy won’t necessarily affect your returns if healthcare demand remains stable.

I've done a deeper dive into the different sectors of REITs which you can read more:

Geographical Based Diversification

Apart from diversifying across sectors, investors can also explore diversifying their portfolios across different countries and regions.

That said, having international exposure may or may not be beneficial to investors – especially if you are based in Singapore with a Singapore dollar-denominated purchasing power.

Here’s what you need to understand when it comes to geographical diversification:

Different Market Dynamics: Geographic diversification may provide investors with different opportunities by investing in countries with vastly different market dynamics that are best positioned for different sectors of REITs.

For instance, an investor seeking to incorporate industrial assets into their REIT portfolio should concentrate on countries like China, Europe, and Australia instead of restricting their exposure to Singapore. This is because Singapore's market dynamics and economic structure may not be ideal for industrial properties.
Different Economic Cycles: Different countries are often at varying points in their economic cycles. Geographic diversification allows you to capitalize on these cycles — such as high-growth potential in emerging markets or the stability of developed markets.
Currency and Political Risks: Investing in REITs with offshore properties exposes you to currency fluctuations and political risk. If you are an investor whose purchasing power is denominated in Singapore Dollars, having heavy exposure to foreign currency is often detrimental as historically, the strength of SGD has resulted in FX losses in distribution from REITs with offshore properties.

To mitigate this, consider REITs with hedging mechanisms or those that focus on stable, low-risk countries. This can provide exposure to foreign markets without subjecting your portfolio to excessive volatility.

Parkway Life REIT is a prime illustration of a REIT that employs effective hedging strategies, as evidenced by its ability to raise its DPU even in the face of declining top and bottom-line results caused by FX losses.

The Diversification Problem

Unfortunately, most of the REITs that are listed in Singapore already have a diversified exposure across different sectors and geography which makes it difficult to achieve a proper portfolio allocation if not managed intentionally and planned properly.

One of the biggest misconceptions in REIT investing is that simply holding a large number of REITs guarantees adequate diversification.

Adding REITs to your portfolio without careful consideration for diversification could lead to increased concentration in a particular sector or country, contradicting the initial goal of diversification.

Effective diversification requires evaluating the combined risk exposure of your portfolio in different sectors, regions, and asset classes. When dealing with the diversification challenge presented by Singapore REITs, you need to assess how individual REITs influence the overall sectorial and geographical exposure level.

How To Achieve Proper Diversification

To achieve proper diversification, we need to:

Analyzing Portfolio Overlaps: When investing in multiple REITs, it’s essential to review the underlying properties and tenants to avoid concentration in a single sector or country. For instance, two diversified REITs could both have heavy exposure to U.S. office spaces, leading to higher geographical and sectorial risk than intended.
Measuring Geographic and Sectoral Weighting: Use tools or data sources to measure the overall weightings of each sector and geography in your portfolio. This will help you see if your portfolio is skewed too heavily towards one type of asset or location, which could impact returns if that area experiences a downturn.
Monitoring and Rebalancing: As market conditions evolve, the relative weight of sectors and geographies in your portfolio may shift. Periodic reviews and rebalancing ensure your portfolio maintains a desired level of diversification without unintentionally drifting towards a single sector or country.

Doing so ensures that you are not overly exposed to a specific sector or country that may not be aligned with your risk and return objectives.

A properly diversified REIT portfolio will provide you with:

Reduced Volatility: By spreading risk across sectors and geographies, you’re less likely to experience severe losses from any single downturn, helping to keep your portfolio’s performance more stable.
Income Stability: Diversified REITs can help maintain consistent income, even when certain sectors or countries experience downturns. This is especially important for retirees or income-focused investors.
Growth Potential: Geographic and sector diversification provide opportunities to capture growth from various regions and economic trends, helping you achieve a balanced mix of income and capital appreciation.

As a REIT investor myself, I’ve designed my database to track and aggregate the sector and geographical exposure across all the listed REITs in Single, a sample of it is as follows:

Conclusion

In REIT investing, proper diversification means more than just holding a variety of REITs.

By considering the balance across sectors, geographies, and asset quality, investors can build a portfolio that minimizes risk while maintaining stable, long-term income potential.

As the REIT landscape in Singapore continues to expand internationally and across varying sectors, taking the time to construct a thoughtfully diversified REIT portfolio can ultimately lead to better resilience and returns, helping you achieve your financial goals.

If you would like to read my analyst report on Singapore Listed REITs, you can find them on my telegram channel:

*Join the channel → click on the channel name → under files → download the report you want!

If you would like to learn about REIT investing, you can find my entire methodology in my eBook: Retire With REITs here:

If you are looking for personalized financial advice, I offer a 1-to-1, fee-only consultation where you will receive personalized strategies to design, implement and manage a profitable REIT portfolio. You can find out more about it here: