Expanding the investment scope of REITs to enhance flexibility and risk diversification

Real Estate Investment Trusts (REITs) are familiar to some people but less so to others. Well-known examples such as Link REIT and Sunlight REIT illustrate how REITs work. While REITs are less commonly used than stocks or bonds, they can be a worthwhile option for MPF investors seeking stable income and diversification.

The majority of income is distributed as dividends

REITs primarily invest in real estate, typically focusing on large-scale commercial properties such as office buildings, shopping malls, and logistics facilities. Their returns are driven by property values and rental income, and they generally distribute at least 90% of their income to investors. Taking Link REIT as an example, its payout ratio is close to 100%. This allows investors to gain indirect exposure to the property market and benefit from income generated by rental income.

By transforming large commercial real estate projects into tradable investment instruments, REITs significantly enhance investment accessibility. REITs can be traded as easily as equities, offering high liquidity and ease of realisation. Combined with professional management and stable dividend payouts, they target to provide investors with a stable income stream.

REITs ride the AI technology trend

In recent years, some REITs have also tapped into the growth of AI by investing in assets such as data centres and telecommunications infrastructure. Given their relatively low correlation with traditional equity and bond markets, REITs can help diversify risk and potentially improve overall portfolio outcomes.

Low allocation to REITs in MPF

While REITs offer relatively stable income, they currently represent only 0.4% of MPF investments (as of March 2024). Under existing MPF regulations, there is no limit on investments in REITs listed on approved exchange markets in Hong Kong, the United Kingdom, the United States, and Australia. For REITs listed in other markets, such as Singapore, Japan, Canada, France, and the Netherlands, investments are capped at 10% of fund assets.

Upcoming expansion across 11 markets

Recent announcements indicate that the Mandatory Provident Fund Schemes Authority (MPFA) plans to relax the current restrictions. While there is currently no limit on investments in REITs listed in Hong Kong, the United Kingdom, the United States, and Australia, this unrestricted scope will be extended to include Singapore, Japan, Canada, France, and the Netherlands, with the existing 10% cap removed.

In addition, following the inclusion of REITs listed on the Shanghai and Shenzhen stock exchanges under the Stock Connect scheme, the MPFA also planned to allow MPF funds to invest in these assets without any limit.

In other words, the number of eligible markets will expand from four (Hong Kong, the United Kingdom, the United States, and Australia) to eleven in total. This expands investment options and helps fund managers diversify across markets more effectively, improving portfolio flexibility and efficiency.

REITs as core income investments and overall outlook

As these above measures are implemented, REIT allocations within different MPF funds are expected to increase. In particular, income-focused funds may incorporate REITs as a core holding to support stable income generation, while multi-asset and lifestyle funds could raise their exposure to enhance diversification.

Whether dedicated REIT funds will be introduced will largely depend on members’ demand in the future, which will in turn shape trustees’ product development priorities.

Overall, the global REIT market is well-established, with strong liquidity and a wide investment universe. As REITs become a permissible investment option under MPF funds, MPF investors may benefit from the flexibility brought by the increasing availability of REIT exposure within MPF funds subject to their asset allocation preferences and under the oversight of MPF trustees.