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Investing in REITs: A flawed strategy?

Monday, June 6, 2011

I have been told by some that my strategy of investing in REITs is a flawed one. I am also sure that there is no paucity of investment blogs out there saying that one should avoid REITs as they are always hungry for funds and are likely to go hat in hand to unitholders regularly or indulge in private placements.

If I were to be in the mood, I would pen short comments to correct what I feel are bias thoughts. Of course, if the writer should be downright rude, I would return measure for measure. There is always room for discussion and even room to disagree. However, I take a very dim view of bigotry and bad behaviour.

One of the catalysts for the above paragraphs is an article I read in The EDGE regarding Olam's raising US$600 million through selling of more shares. This, I have no doubt, would dilute the interests of minority shareholders.

To the people who would avoid REITs but would invest in companies like Olam instead, I wonder how is Olam different in such an instance? Raising funds to buy more income generating assets sounds like a strategy for growth which any REIT might pursue.

Personally, my investments in REITs have done very well in the last two years with the exception of Saizen REIT but we know why that was so. If we are making money in our investments, we must be doing something right. However, we have to remain vigilant to ensure that our investments remain in good health. This is true whether we are invested in REITs or companies.


47 comments:

Createwealth8888 said...

To know whether an investing strategy works well or not, we will need to complete at least one full market cycle of either bull-bear-bull or bear-bull-bear.

AK71 said...

Hi CW,

Ah, if that is all it takes, I think I have proven that investing in the right REITs can be very rewarding even through a full market cycle:

See: First REIT: This one is for keeps.

I first gained exposure to First REIT many years ago and added to my long position in the last bear market. In the subsequent recovery to the present day, the value of my investment in the REIT has grown vastly.

You could click on the label "First REIT" at the end of the blog post to read a string of posts on the REIT if you should be interested to see how it has grown. :)

Drizzt said...

Here is the thing. You cite one good example but for many of us, it has been a hurting experience.

REIT in general is not a good investment if the manage,net screws up big time.

Like business tryst they tend to prey on people hungry for yield without understanding it's structure.

Even though I do hold some reits I will not recommend people to form majority of the portfolio with it.

Those that have global investments and allco at 1 dollar int laughing now

AK71 said...

Hi Drizzt,

This is why I said "the right REITs". ;)

Of course, there were badly run REITs just like there were badly run companies. A favourite punching bag is MI-REIT, the present day AIMS AMP Capital Industrial REIT, if we kept an open mind and recognised the bargain that it was even after its recapitalisation exercise and bought more, we would do very well.

Actually, if you would like another example of a REIT that did well from its IPO till today, it would be Suntec REIT which I have as well and which I added to my long position in the last bear market too. ;)

la papillion said...

Hi AK,

There are so many ways to do reits. You can buy and hold or you can do crisis investing or you can trade it. How we get our investment returns has more to do with the individual's methods than the instrument itself, I believe.

A pen and a paper. Under the right hands, it'll turn into pages of literary works or drawings. Under any other hands, it's just doodlings.

Let the light of reflection shine upon ourselves first.

AK71 said...

Hi LP,

Your comments are always illuminating in a style that's so distinctly yours. ;)

Indeed, what is the strategy we are employing might not be the same as what are we buying.

We can most certainly employ different strategies even if we should be investing in the same instrument. :)

I believe you have checkmate. ;)

Drizzt said...

I think you all are missing the point here. What the people actually means is that as investment that appreciate either with div or cap appreciation reits do worse.

Take a snapshot and enter at that time which asset class does best. You will realize reits aren't that attractive.

The argument given is that we must be smart and nimble but if a asset class needs us to do so much fancy footwork then perhaps it is flawed.

Createwealth8888 said...

Cowboys like milk so they look for cows.

I don't really like milk so I avoid becoming cowboys.

la papillion said...

Hi Drizzt,

I don't see why trading reits is called fancy footwork. Is buying and holding the only way to realise the investment potential of an instrument? Or is there any other instrument where we can buy and forget?

I think at different times, we must do different things. One kind of investment simply does not fit into all the different times of the market cycle. Doing fancy footwork is EXACTLY what a good investor or good trader with limited resources should do.

AK71 said...

Hi Drizzt,

I do not understand why you say that as investments, REITs do worse than others (in terms of dividends and capital appreciation). This is especially mind boggling when about half of your investments currently are in REITs. One would think that you would avoid REITs.

I think it is overdue that we stop thinking of REITs as a flawed instrument. It is not. We should realise that there are REITs which are better run and there are those which are not. The same goes for companies. It is up to us investors to pick out the winners and avoid the losers.

AK71 said...

Hi CW,

I am amazed that you do not like milk. Although I do not like your analogy particularly, I recognise the validity and milk in this instance would refer to income.

Apart from those who only target capital appreciation, as investors we would all be investing for income in one way or another.

Indeed, we can extend your strategy of collecting pillow stocks to REITs as well. For example, my current investment in Suntec REIT is actually free of cost as I divested the rest of my investment in the REIT for a nice gain. I will, in all likelihood, be getting quarterly income from this REIT (at zero cost).

Of course, you are probably comfortable with what you have been doing and since it works for you, there is no reason to change. :)

Paul said...

Hi AK71

I'm a firm believer of REITs and I have been investing in many REITs (and still holding to most of them) since IPO.

Not sure if you frequent VauleBuddies but in response to a mail, I decided to list down the REITs I invested since IPO. I participated in all equity fund rising religiously. And I also took opportunities to increase my stakes during the financial crisis year.

Take a look at my record over here -->
http://www.valuebuddies.com/thread-255-post-10060.html#pid10060

Out of the 11 REITs I have invested since IPO, only 3 is yielding negative returns.

My top 3 performing REITs are CDL Htrust, PLife REIT and Suntec REIT. Suntec which I am vested the longest yield 16% p.a.

I have not included others like A-REIT, K-REIT. CMT and CCT (which I did not get at IPO) but which are also yielding decent returns.

How does one argues against returns like mine? The fact speaks for itself. Investing in REIT has been good for me.

Personally I can't understand some people reservations about investing in REIT but all of us has our personal approach to investing. I do not believe that investing in REIT is a flawed strategy because their performance speaks for itself.

Data said...

These people have a grand theory of why REITs are bad for investors, and maybe an anecdote or two, but they cleverly never mention the advantages and the favourable examples. Obviously as AK71 and others have said, some REITs are good investments and others are not - there is nothing about the structure that guarantees a good or bad outcome.

I wonder why some people have a vendetta against REITs. S-chips or locally-listed business trusts, I can understand - there are far more examples where those went awry.

Temperament said...

Hi,
The type or sector of share you believe in investing is not the deciding factors whether you make money or not. i think the most important factor is the "qualities" of the share you invest in:
Well qualities = do your homework + then pray for luck or blessings; depend on what you believe.
Another words all shares can make money if you know them well enough. It only depends on what you believe or like to invest. Don't we have all types of investors in the markets making money?
Shalom.

AK71 said...

Hi Paul,

Thank you very much for sharing your personal experience and how REITs have been good to you.

Thank you also for sharing the link. I believe it is an invaluable resource which demonstrates quite clearly that good REITs, just like good companies, are rewarding investments through good and bad times. :)

Indeed, how does one argue against returns like yours? :)

AK71 said...

Hi Data,

I wonder why some have such a strong dislike for REITs as well.

I am glad that I went ahead with this blog post when I did. I expected a deluge of negative comments but I have been rewarded with very bracing, positive comments too. :)

Thank you for sharing your point of view. I can't agree with you more. :)

AK71 said...

Hi Temperament,

Yes, I agree with you. We can be invested in REITs or companies. If we are invested in the wrong REITs or companies, we are not going to do well. Simple.

I believe in keeping an open mind and seizing any sensible money making opportunity that might come along. This attitude has helped me to make money (most of the time). ;)

Drizzt said...

Haiz, still don't get the point. IF you all are passive and hold to long which asset class is a better investment?

That is what the rest is asking not how smart you are in taking advantage.

Drizzt said...

Perhaps there is only one person here who answered the question of which has the better return when you hold reits vs other equities to perpetuity.

AK71 said...

Hi Drizzt,

Ah, a hypothetical situation. I get your drift now.

When you said you "will not recommend people to form majority of the portfolio with it" in an earlier comment, I was perplexed since half of your investments are in REITs.

Anyway, without understanding an investor's motivations, it is hard to say what is recommended. For example, I guess Paul is more interested in investing for income and REITs are thus suitable for him.

Furthermore, Paul's 16% return per annum is impressive and probably beats the performance of many lesser known professional fund managers out there.

left_ray said...

Well, investing in REITS is still better than unit trust. I have been paying for my investment link insurance for a decade. It's return is so meager that is negligible. Yes, I had some bad experience with REITS like Allco. But back then I was not paying attention to its debt and management performance. Now I am little wiser. I look at it's gearing level and management performance. I avoid REITS that has high gearing, always like to raise funds, and selling/buying properties. I also have bad experience with Tech stock like ST Assembly. Value investing is not easy and even if we know a thing or two about value investing, picking a gem is very hard work and time consuming. Of course buying blue chips with positive cash flow and dominate in their respective fields are better choice. But the rest is also risky and their business model is harder to understand if compare to REIT. Even if we spend a lot of time studying a company, if we are not in their field of work, can we truly say we understand them. We have limited resources and the resources we got are research reports from brokers which are not reliable and investing blogs. If we really want to invest a company we need dedicate our time to attend shareholder meetings and raise our questions. And if possible, we must visit company premise and talk to their staff. All in all, investing in REIT is not so bad.

Paul said...

Let me shed some more light on the performance of REITs vs other equity.

In 2009, I took the opportunity to buy into A-REIT, MIIF, K-REIT, SPH, Starhub and CCT.

1) A-REIT
Absolute yield: 68%
Aggregate yield: 93.7%

2) MIIF
Absolute yield: 105%
Aggregate yield: 130%

3)K-REIT
Absolute yield: 26.6%
Aggregate yield: 34.8%

4) Starhub
Absolute yield: 37%
Aggregate yield: 41.4%

5)SPH
Absolute yield: -0.56%
Aggregate yield: 8.72%

6)CCT
Absolute yield: 23.6%
Aggregate yield: 32.2%

7) Ascott REIT
Absolute yield: -5.5%
Aggregate yield: -1.2%

IMO, it's not very meaningful to talk in hypothesis and postulate on weakness of the REITs structure or on its perpetual returns vis-a-vis other equities.

I cannot and will not comment on other people's portfolios; but I can certainly comment on mine and my investment in REITs has been good for me. And my investment in REITs comprises about 30% of my portfolio.

Of my non-REIT/trust shares, ARA, Starhub and Genting are my star performers.

AK71, unfortunately my portfolio on the whole does not yield as high as Suntec. So its not correct to use one REIT's performance to compare against the performance of fund managers.

AK71 said...

Hi left_ray,

Thank you for a very balanced comment. :)

I suffered the same pitfalls you did. I had Allco and MI-REIT too. I blogged about my mistakes and ignorance of the past as well.

I try very hard not to make the same mistakes again, crystalising a set of guidelines for myself when investing in REITs. So far, so good.

I like investing in blue chips as well and count SPH as one of my bigger investments. I used to have a large position in ST Engineering but have pared it down since.

I used to own shares in SCS and Chartered Semicon, both were blue chips. They became blue black chips. ;p

I look forward to your next comment. :)

AK71 said...

Hi Paul,

Thank you for taking the time to share more details and to clarify the performance of your portfolio. Much appreciated. :)

I agree with you that it is probably not very useful to talk down REITs and suggest that equities are better investments.

In the final analysis, as investors, we have to do our due diligence and make sure what we invest in are the best choices available. Even then, there is some subjectivity and we need a healthy dose of luck. :)

JW said...

The same strategy put into the hands of different people can still yield different results.

Calling investments in REITs flawed if one has failed personally is akin to saying you can't do a job because your tools are lousy. It's really easy to put the blame on the tools.

AK71 said...

Hi JW,

It has been a while. Good to hear from you again. :)

If I failed in something, I would try to find out why I failed and if I could do better. This is especially the case if others have succeeded doing the same thing. :)

la papillion said...

Hi AK,

There are two value system at work here: one is that a lousy company can be a great investment at the right price. The other is a lousy company can never be a great investment at any price. From my little knowledge of the value investment greats, I think the former is more Graham while the latter is more Buffett.

I think which value system you adopt will greatly influence the kind of response you will have over here.

I don't understand Drizzt at all.

"I think you all are missing the point here. What the people actually means is that as investment that appreciate either with div or cap appreciation reits do worse."

Care to explain what point you're talking about here?

AK71 said...

Hi LP,

I like to think that we can always find good investments at the right prices. It doesn't matter if they are REITs or companies.

This is why, despite the negativity that surrounded the re-capitalisation exercise of MI-REIT, I staunchly supported the offer by AIMS and AMP Capital.

I recognised that the REIT (now AIMS AMP Capital Industrial REIT) still offered great value despite the dilution of its NAV/unit and bought more units then. It was in early 2010, if I remember correctly. It has been pretty rewarding. :)

OT83 said...

Hi AK,

I think different ppl has different way of managing their asset class. Some may like reits, some may like bonds, some may like equities.

Nevertheless, most importantly, I think one must know what one is doing. Different people will has different asset allocation. As long as you are comfy with what you are holding and it really works for you, it is good enough.

Cheers :)

mark said...

I suspect, and by that I mean I am guessing, that he means cap appreciation far outperforms REITs. It seems to suggest a blanket statemet.

I think my point would go like - yes, it can but it doesn't imply always. One or the other.

Anyway this week I have made a decision to reshuffle my money around so I will be taking profit on some reits, and exiting on some rubbish counters and put them somewhere else where I dont have to keep an eye on it on a yearly basis even. New job, new demands,hence new movement.

AK71 said...

Hi OT,

Yes, different strokes for different people, eh? ;)

For sure, we must know what we are investing in and what we are doing. Investing blind is a no no.

There are many roads to Rome and some might take a longer time and some a shorter time. Take the road we are most comfortable with? Good idea. :)

AK71 said...

Hi Mark,

You have made a good point. We have different stages in our lives and what we invest in or whether we invest any money at all should logically have something to do with the stage we are in at that point in time. :)

Good luck and we will catch up soon. I need to settle down into a new routine first. Big changes, as you know.

Isaac said...

Hey AK,

I don't see why people would criticize you for your REIT strategy. To me it's really a case of different strokes for different folks. Every road leads to Rome, whether you take the scenic unpaved one, the ultra modern freeway or just a slow walk whilst enjoying the ride. Your strategy defers from mine, my strategy defers from the forex scalper, etc. Ultimately, what we are in this for is to earn money right? (and to enjoy the ride, of course, with significant help from the cbox :P )

In conclusion, what works for you might not work for others. You have proven your mettle thru the different market cycles by investing in what's best for the market; so as you have had a good run with REITs, I think your record speaks for itself.

Cheers :)

AK71 said...

Hi isaac,

Thank you for the very kind words. Yes, you are right that our strategies might differ but as long as we reach our destination, we would have succeeded. :)

I suppose it is important that I say I was not always so heavy in REITs. I invest according to what I think is good given prevailing circumstances as well as what are my motivations for investing.

If we do not know our motivations for doing something, we could end up directionless and lost, doing silly things which we might not otherwise have done.

Good luck and I look forward to chatting with you again soon. :)

Anonymous said...

AK,

CW is definitely not a fan of REITS. Well, good for him. I suppose you cannot stuff your pillow with REITS. Many of us think FX is risky. But do you think George Soros will think similarly as well ? What do you think about Jim Rogers investing in commodities ? PIMCO concentrates mainly on bonds. Take a look at their track record.

Do what you feel comfortable. Not everyone would or can follow Warren Buffet's style. Each of us make our own mistakes and hopefully learn from them and try not to make the same mistakes again.

I have been lucky picking up MLT and MIIF when they were at their all time lows. Moderately successful with CitySpring, which I have divested since but lost big time on FSL and Rickmer, which too have been divested. If you are ITM for the majority of your portfolio and can sleep comfortably at night, carry on doing what you have been doing. Let the others do what they think is best for them.

It is the same with the SCB trading account. Some comments I have heard are downright condescending. Only thing I can say is, if you think you do not need the savings then don't use it. Let the others make their own decisions. It is their money after all. Why all the snide remarks ? Incidentally, I have not decided on opening a SCB account.

REIT Fan

Drizzt said...

I am more interested from the pt of view that for a three year period factoring div and capital appreciation a basket of REIT vs a basket of mixed stocks on the sgx which one turns out better. That is what the folks on the street talks about.

la papillion said...

Hi Drizzt,

Thanks for your clarification. Now I know exactly what you're talking about.

AK71 said...

Hi REIT Fan,

Well said. :)

It should, however, be noted that I am not really a fan of REITs per se. I just think that in the current environment, REITs would do quite well and invest accordingly.

Of course, blogging so much about REITs might have led people to think that I am only and have always been heavy in REITs. ;)

Thank you for the well written comment. :)

AK71 said...

Hi Drizzt,

I doubt that is what folks on the street talk about. Most don't even know what are REITs.

If you are referring to folks in the local financial blogging scene, I am also pretty sure that it is not what they are talking about. Visit CreateWealth and LionInvestors' blogs and you would see negativity when they talk about REITs.

As for comparing a basket of REITs vs a basket of Singapore equities over a 3 year period, including dividends and capital gains, is this based on foresight or hindsight?

Based on foresight, some stock picking skills would come in and we will wait for 3 years to see how things turn out and I am pretty sure luck would play a part.

Based on hindsight, well, we could all make a pretty convincing case for either equities or REITs. ;)

Anonymous said...

Hi AK,

I don't really know where this cowboy reference to reits came from, but from my limited knowledge of cowboys, they surely prefer a bottle of wiskey to milk anyday and horses to cows.

You see its the farmers who wants milk and cows and they grow crops too. Its just being cynical to tie cowboys to reits.

I suppose if you got nothing nice to say its best to say nothing.

KL

AK71 said...

Hi KL,

I enjoyed your comment very much. :)

I dislike the analogy too but unfortunately, it has been popularised in certain quarters. I guess the person who came up with the comparison should do some re-thinking. ;)

Anonymous said...

AK,

I know many look up to CW for his wisdom and all. But I think most of us are still very much risk averse. Compared to putting money in a FD account, REITS are far more superior. Yes, capital appreciation is possible but nowhere near Olam, Noble or Bio. I would hazard a guess that many would be happy getting back between 5% to 7 % per year from their investments.

Please tread carefully for all you newbies. But it does not mean that REITS are risk free. From my observations, once you have a reasonably big base, >750k, REITS can provide a good passive income.

I had my fair share of excitement in my younger days. Buying Kep Corp at$4 and selling at $14 or SIA Engrg at$1.35 and selling at $4.80. Capital preservation is more important for me now.

Open your eyes and make your own decisions. People will laugh with you in good times. In bad times, you will cry alone.

Fellow Investor

AK71 said...

Hi Fellow Investor,

You made some good points and I agree with you that much would depend on a person's risk appetite.

Aren't we lucky that if we buy a car these days, we don't have to buy a Model T simply because there are no other choices? ;)

Cory said...

I think what's Drizzt meant is on average performance at MACRO Level.

Is just like S-Chips. 9 out of 10 are fouls. You can argue not all and continue to advise people to look at it OR you can advise novices to totally avoid it.

You will be surprise many experts do fail like novice do. So is a game of opportunity risk involves.

Remember this. When you earn from stock, you think you are good when in reality, maybe 50% of the stock you picked is based on wrong conclusion but you earn money anyway. However in S-Chip situation, the price to pay is likely to be large loses.

I invest in GAGR because i have AK does indepth investigation. I got out as soon i made some. But if you ask me whether i will get another resource counter myself, i will probably have higher chances of losing money.


Cory

AK71 said...

Hi Cory,

I like to think that I was mostly lucky with Golden Agriculture. ;)

I am glad you made some money from trading the counter. :)

Ray said...

Hi AK,

Sorry to comment on one of your old posts. You mentioned "I try very hard not to make the same mistakes again, crystalising a set of guidelines for myself when investing in REITs. So far, so good."

Would you be so kind to share / point me to where you have blogged about these guidelines?

As you probably already know by know, I'm new to the investment scene and am very attracted to REITs due to their high yield.
But failed experiences by people talking in forums worry me so I am keen to educate myself so that I can steer clear of pitfalls. I have been reading eBooks that veterans like Drizzt have pointed me to. But learning first hand from people who have been through storms and become successful is really imporant.


Thanks in advance.

AK71 said...

Hi Ray,

All of us have had bad experience with certain things at one point or another.

Personally, I had my share of bad experience with REITs and business trusts. Instead of brushing them off as bad instruments, I decided to read up more about them and how they could be good investments.

Over the last two years, I have become a bit better at REITs. The set of guidelines I referred to has become more comprehensive over time.

So, this post is somewhat outdated but this was what I was referring to:

High yields: Successes, failures and the in betweens.

If you just search "REITs" in my blog, you will see a list of blog posts. You might want to read some of the more recent ones to understand where I am coming from. :)

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