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REITs with pedigree are safer?

Thursday, November 24, 2011

Many have told me that I am playing with fire investing in the REITs that I do and by now, regular readers would know how I would reply to them.

Some who do invest in REITs tell me that they only invest in "blue chip" REITs because these have strong "blue chip" sponsors and more likely to survive a downturn. They would still avoid the REITs I am invested in. I don't have a problem with that.

I just read this in The EDGE:

"Moody’s Investors Service said it has a stable outlook for Singapore Real-Estate Investment Trusts. However, stress tests show CapitaMall Trust, Suntec REIT, Mapletree Logistics Trust, and K-REIT run the most risk of exceeding Moody’s expected leverage parameters in the event of a downward revaluation of properties, the ratings company said in a statement, reported Bloomberg."

Some say just invest in all things blue chips and we should be safe. However, the blue chips card could be played so much that it could turn black. Blue could and some did become blue black.

Oh dear, I just remember that I have vested interest in Suntec REIT and K-REIT too!


Informative Blogger said...

remember capmallasia
Is it safe ? See the fall


AK71 said...

Hi Chan,

That is probably due to sentiments which is in the domain of TA. This blog post is about fundamentals.

If fundamentals are good and price falls, not too bad. If fundamentals deteriorate and price falls.......

Singapore Man Of Leisure said...

I just can't help it!

I so envious! Why no one offer their good intention advice to me?

Oh! I just remembered! Tree big attract wind!!!

I small weed :(


SmithKline said...

Hi Chan,

Can't really classify capmallsasia under the Reit catagory. It is more of a reit manager i suppose. The reason for the price decline might be due to the timing of its building phases. I believe there's value to be unlocked from this company as more than half of their malls are still under development. construction

Anonymous said...

Hi AK,

A key argument for a blue chip sponsor is their ability to support a REIT by subscribing for rights issue when they are in trouble. But I guess people are forgetting that a really well-run REIT won't need to turn to equity fund raising exercises when times are bad ! In short, it is far more rational to buy pedigree Managers rather than pedigree sponsors. Naturally, there are not mutually exclusive either.


INVS 2.0 said...

Hi AK71,

Phew... I have no holdings on the highlighted REITs. :)

Data said...

This article at Yahoo Singapore News has more details from the Moody's report: Moody's: Stable outlook for Singapore REITs, but risks apparent.

Basically what Moody's is saying is that should their properties get revalued downwards by 10-20% then these REITs will likely exceed gearing of 40-45% leading to a ratings downgrade. How significant this is depends on how much you care about Moody's credit ratings. To me it is quite an obvious result, even without crunching the numbers.

FoodieFC said...

well, anything can happy. Look at olympus.

AK71 said...


Correction, trees do not "attract" wind, they "catch" the wind. Haha... ;)

Anyway, advice should always be taken with a pinch of salt. So, if we suffer from high blood pressure and cannot take salt, forget the advice. ;p

AK71 said...

Hi Nick,

I am accumulating shares of ARA on weakness. ;)

AK71 said...

Hi INVS 2.0,

It is a stress test and doesn't mean that these REITs are riskier than others. Haha.. But if it gives you a peace of mind, good for you. :)

AK71 said...

Hi Data,

Thanks for sharing the link. :)

It is quite obvious what would happen if property prices should be revalued downwards by a significant % in a recession.

REITs which have more conservative gearing would pass such stress tests with flying colors. Examples: First REIT and LMIR. ;)

AK71 said...

Hi Foodie FC,

Indeed, anything can happen. Knock on wood. ;p

INVS 2.0 said...

Hi Ak71,

I used to have Suntec but felt that its share price wasn't able to absorb well an economic shock. The volatility for this REIT is high, I felt. I sold it and went for Starhill Global instead. :)

Anonymous said...

Haha very true AK. ARA is a good way to get around it !

Perhaps, we should also aim to buy REITs run by pedigree Managers as opposed to REITs with pedigree Sponsors as well. I think pedigree Managers can create a whole lot more value for unit-holders as opposed to some pedigree sponsor.


Ray said...

Hi, AIMS wasn't mentioned. Is that good or bad? :)

AK71 said...

Hi INVS2.0,

I have been a unitholder of Suntec REIT since the last crisis. So far, so good.

However, it will be experiencing some headwind with office properties being a larger component of its total AUM now.

Its proposed AEI of Suntec City Mall could also affect its income from its retail spaces in the short run.

AK71 said...

Hi Nick,

It could be the case, of course. Really depends on the integrity of the people at the top. This is the toughest part in investing.

I like to believe that there are good sponsors who are not out to fleece minority unitholders. I also like to believe that there are good managers who align their interests with those of minority unitholders'.

Time will tell if I have made the right choices. :)

AK71 said...

Hi Ray,

I believe it simply means that AIMS AMP Capital Industrial REIT was not part of the study. ;)

Ray said...


Can I seek your opinion on an article in TodayOnline?

"As more properties in Singapore are acquired by the REITs, there will be fewer available on the market. As such, the asking price by the remaining landlords can only get higher. Given more time, it will become clear, if it is not so now, that the current model is not sustainable in the long run.

REITs are often presented as defensive plays as it relies on revenues generated from income-producing properties held in its portfolio. While it may be so in more mature economies, the situation is different in Singapore. "


AK71 said...

Hi Ray,

I do not see why the situation is different in Singapore.

Colin Tan, the author of the article you mentioned, is making some generalisations about REITs which many people are prone to do. I would rather look at individual REITs and determine which ones I would invest in.

There is nothing wrong with REIT as an investment instrument per se and there is definitely nothing to suggest that the acquisitive model is unsustainable in the long run here in Singapore. Substantial evidence is lacking.

A REIT with more AUM has various advantages compared to a smaller REIT. Therefore, as long as acquisitions are beneficial to unitholders, I do not have any issues.

The article suggests a picture of ever tightening supply and sellers' asking prices going higher and higher. If only it were the case, I would not have sold my properties in recent months.

In a recently released report by MIT, iirc, it was stated that less than 20% of available industrial real estate in Singapore are in the hands of REITs. Plenty of potential supply, if you ask me.

Data said...

The Colin Tan article has many problems, besides the strange claim that REITs have cornered the property market in Singapore. He says the sponsors always offload properties to their REITs at high prices. He forgets or conveniently omits the fact that both sides have to get independent valuations before they enter into a transaction. Is he alleging that these valuations are all not done properly? Now that would be news, and definitely something to investigate.

Then he says that REIT investors are screwed because REIT managers are forced to do the bidding of the sponsors such as buying properties at high prices at the wrong times. He forgets that REIT investors also have a choice of when to buy into the REIT, such as during property market or stock market downturns. If investors pay too much their returns will be poor - so in what sense are REITs different from stocks in general?

All these people who have a vendetta against REITs in general never explain why many investors in many REITs can and have enjoyed handsome returns, even through the global financial crisis.

Ray said...

Hi AK,

Thanks for your insight.
Did you mean property prices in SG fell recently? I didn't think that was possible given the endless demand and supply still somewhat insufficient for the time being.

AK71 said...

Hi Data,

I put it down to ignorance. People who lack knowledge about some things usually fear these things. However, I like to think of the article concerned as a well intentioned one. ;)

I also mentioned in one of my blog posts that investing in REITs and companies presents similar risks. Investing in REITs is definitely not a flawed strategy. It depends on our motivations in the first instance.

The blog post is:
Investing in REITs: A flawed strategy?

AK71 said...

Hi Ray,

Nope, I said that the resale market is drying up. Try putting up a piece of private property for sale now and you will know what I mean.

You will see most owners of recently completed condominiums putting their units up for sale. The sellers corner of the market is getting crowded and expectations will become more "realistic" (translation: lower asking prices).

There will be more condominiums completed in the coming quarters till 2014. The sellers corner will become even more crowded.

People who bought condominiums two years ago will still make money if they sell now. People who bought condominiums a year ago might still make money. However, those who are buying condominiums now are likely to lose money in the next few years.

Of course, the HDB market is different. This is more resilient. Supply is still tight but this situation has improved thanks to Mr. Khaw B.W. HDB prices will moderate in time. I do not doubt it.

Nothing goes up in a straight line, definitely not property prices. There will be a correction which means prices coming down by up to 20%. Beyond that, it is a crash. I will wait and see.

Ray said...

Ahh, I see.
You are referring to the resale market.
I don't have private property to sell so I can't test water myself but from what we see from e.g. the sale of Central-8 in Tampines, properties (albeit C8 being DBSS) are still climbing like nobody's business. Yes, we are talking about private properties which are obviously different from HDB but the end of the day, if HDB's prices are soaring like Central-8, private properties will benefit as well. Why wouldnt buyer pay alittle more for more facilities and security than DBSS, right?

I'm quite ignorant to property market, so pardon me if my questions sounded stupid.

AK71 said...

Hi Ray,

HDB flats are only open to Singaporeans and PRs. Their limited supply till recently forced quite a few to turn to the private real estate market. The aggressive building of new flats will remedy this.

The private real estate market is the real gauge of investors' sentiments. It is open to everyone. The resale market is an even more accurate gauge as investors who are buying properties for rental income like completed projects as they could realise an income stream immediately. The sub-sale market (of properties under construction) is an accurate gauge of sentiments of the speculative investors. They buy in the hope of flipping and making a quick profit. Looking at the sub-sale and resale activities, we will see that things are slowing down.

Hwang said...

Talking about private properties in SG, i am getting more and more hearsay that Johor properties will be/already getting the spillover effect, thanks to the overly high prices on the island and tight HDB market. A lot of my colleagues are buying there, especially if the other half is a Malaysian. Some even rent out their units here and commute daily.

Moreover, having stayed in HDB for years, Singaporeans are yearning for a landed property with a private garden. Together with the liberation of Malaysian real estate, Johor properties are rising due to speculations (Bukit Indah for example), which may not be good for the long run. Too many development, more floods too.

It may also turn out like Klang Valley, which is having an oversupply around 2014/5 as most will have TOP by then.

AK71 said...

Hi Hwang,

My family bought a condominium in K.L. donkey years ago and sold it a couple of years ago at a loss. So, I avoid Malaysian real estate.

However, I have heard many people making lots of money investing in real estate in Malaysia too. So, what to do?

Personally, I will stick to what I know and what I am comfortable with. There are enough money making opportunities for me in Singapore. ;)

jianling said...

malaysia houses can be good to stay too :P if investing in it fails.

AK71 said...

Hi jianling,

Sure, it is a personal choice. I would rather stay in Singapore though. :)

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