Retail purchases of real estate investment trust (REIT) exchange-traded funds in South Korea rose more than 40% last month from August, even as rising government bond yields raised concerns that the dividend appeal of REITs would fade. REITs are usually avoided when rates climb, because higher borrowing costs weigh on them and their yields look less attractive next to bonds. Analysts said bargain hunting after steep declines, combined with demand for stable cash flow amid wider market volatility, drew money into the sector.
Retail investors bought a net 29.8 billion won ($20.6 million) worth of the 14 REIT ETFs listed in South Korea between Sept. 1 and Oct. 7, according to financial data provider FnGuide on the 12th. That was 44.4% more than the 20.6 billion won in net purchases in August.
Money flowed into large, liquid products. Retail investors bought 20.7 billion won worth of Mirae Asset Global Investments' TIGER REITs Real Estate Infrastructure ETF last month, up 29.4% from August. Samsung Asset Management's KODEX Korea Real Estate REITs Infrastructure ETF drew 11.2 billion won, more than triple the 3.6 billion won it attracted in August.
The market has offered varying explanations for the increase in REIT buying while bond yields remain elevated. REIT share prices have traditionally moved inversely to interest rates. When government bond yields rise, the dividend appeal of REITs fades in relative terms, and interest costs on debt taken on to acquire properties increase, which can shrink the funds available for dividends.
One explanation for the inflow of retail money is that valuations have bottomed out. Investors appear to be buying in stages at low prices, betting on a rebound rather than further declines. Expectations of improving fundamentals also played a role: if rent increases and lower vacancy rates materialize as the economy recovers, they could partly offset higher interest costs.
Still, the concentration of money produced a clear divide among products. Only three of the 14 REIT ETFs saw net purchases increase from the previous month. Five swung to net selling, pointing to concentrated trading focused on higher-quality names.
Experts advise a selective approach that examines the business competitiveness of individual underlying assets once the direction of interest rates becomes clearer. "In a period of rising rates, discount rates on asset values are a burden, but once a new rate level settles in, attention will shift to rents, occupancy rates and earnings strength," said Park Se-ra, an analyst at Shinyoung Securities. "Investors should focus on the fundamentals of the assets each REIT holds."
