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Staying positive on S-REITs.

Sunday, June 19, 2011



In the recent weeks, shares of property developers, telecoms companies, commodities companies, shipping companies, gaming companies etc have mostly declined in price.

So, in a sea of red, is staying uninvested the way to go? Very probably, many are doing just that. Personally, I am staying invested and mostly in selected S-REITs. In an environment of greater volatility, S-REITs' unit prices have demonstrated resilience and my portfolio of S-REITs has remained relatively unscathed in the recent market weakness.

Some asked me if it is safe to invest in S-REITs now or add to their long positions. Truthfully, I cannot give any answer in the affirmative. I will ask you to instead consider the more discussed circumstances in which S-REITs could fail.

1. Interest rates suddenly shoot through the roof when the time comes for S-REITs to refinance.

2. Credit drying up, leading to S-REITs being unable to refinance at any price.

3. Tenants defaulting en-masse leading to S-REITs being unable to meet their financial obligations.

4. Value of properties declining to the point where gearing exceeds 40%.

Then, ask ourselves how likely are these events to take place in the next two years. I have given some thought to these points and I remain sanguine about the situation.

1. It is unlikely that interest rates would shoot through the roof overnight or over the next two years. We must see some pretty strong inflationary pressure before interest rates would go higher. U.S. interest rates being revised upwards by 0.25% every few months is hardly catastrophic. Unless funds are able to get higher returns with similar or lower risks elsewhere, I do not see S-REITs turning unattractive, all else remaining equal.

2. The Great Depression delivered a lesson which has not been forgotten if the actions by central banks around the world were anything to go by. Any businessman would know that credit is the lifeblood of the economy. Credit dries up, businesses come to a halt and great hardship would follow. Central banks will ensure that this never happens again. We came pretty close in the last great recession and already got a fleeting glimpse of what could happen if credit dried up completely.

3. The supply of industrial space is likely to remain tight in Singapore in the near future and I have blogged about this. If the economy takes a sudden turn for the worse, we could see some tenants defaulting but it is unlikely that tenants would default en-masse. Even in the last recession which was one of the worst I have seen, nothing that serious took place. With interest cover ratios of 5.7x or more, industrial S-REITs are not about to make me lose sleep at night.

4. Most S-REITs are conservatively geared. Even with a gearing level of 32%, we have to see property valuations dropping by some 20% before gearing would hit 40%. A 20% decline is pretty severe and I do not think it likely unless the current valuations are frothy. If we look at the current valuations of industrial properties S-REITs, they are still very much below the peak before the last recession.

Although I remain sanguine about the fundamentals of the S-REITs I am vested in, I do recognise that prices are driven by sentiments. If Mr. Market should go barking mad and is willing to sell to me at prices which would give me distribution yields in excess of 10% like it did in the last recession, I would gladly increase my long positions. Yes, that is my plan. Keep a warchest ready and seize the opportunity if it should present itself.


Related post:
Investing in REITs: A flawed strategy?

8 comments:

Temperament said...

Hi AK71,
Very Good Post. i know you have great interest in S-REITS. if you are only allow to keep one, only one reit for long term investment, may i know which one will you keep and why? Care to share your knowledge with this old ignoramus.

I will be "flabbergasted" if ask to answer this question. Sorry, of course if i can i would not have asked.
Thanks.

NB:
I notice almost all reits are CPF stocks; including Indonesia reits.
i have quite a number of reits too.

AK71 said...

Hi Temperament,

It would have to be First REIT. ;)

It has a good track record, low gearing, strong sponsor and a respectable distribution yield of >8%.

Good luck. :)

Roy said...

Hi AK71,

Thank you for the post, very informative..
Would Cache be also a good target to move in as well? Thanks.

Regards,
Roy

Temperament said...

Hi,
Ah... First REIT. i tried to buy when it was 72cents but i could not get any. i will try again sometime.
Thanks.

AK71 said...

Hi Roy,

Cache Logistics Trust, I believe, is solid as a rock. ;)

See:
Cache Logistics Trust: 1Q FY2011 results.

AK71 said...

Hi Temperament,

You are welcome. I was also waiting for a long time at 72c at one stage and finally bought up at 73c and 73.5c.

First REIT: 1Q FY2011 results.

AK71 said...

Kim Eng said funds are not likely to switch out of Singapore real estate investment trusts (S-REITs) as there are not many investable alternatives in the market, and within this space retail and industrial REITs are the most resilient.

There are a total of 25 S-REITs spanning the office, retail, healthcare, hospitality, industrial and residential sub-sectors. Examples are CapitaCommercial Trust, CapitaRetail China Trust, Ascott Residence Trust and Ascendas REIT.

Maybank, which met 17 Hong Kong-based fund houses recently, said most clients view S-REITs positively as they have one of the highest yield spreads among their peers, outperforming even major REITs markets such as the United States, Australia and Japan.

S-REITs were currently trading at a 2012 fiscal year yield of 6.1 percent and a yield spread of 462 basis points (bps), Maybank said, adding that many funds believe there is headroom for another 80-90 bps compression.


REUTERS, 3 Sep 12.

AK71 said...

While we view rising bond yields as generally negative for SREITs, there seem to have minimal impact on S-REIT stock prices at this juncture.

We reckon that this is because investors continue to focus on S-REITs’ potential to deliver accretive acquisitions which will more than compensate for the
tightening of yield spreads.

In addition, the lack of an investable alternative asset class lends support to the S-REITs maintaining its current premium valuations in the immediate term.


DBS Vickers, 7 March 2013.

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