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Office S-REITs VS. Industrial S-REITs (3).

Thursday, December 15, 2011

Earlier this year, I shared some salient points in a research by DTZ.

Update (23 November 2011):

Singapore's office property market has lost its appeal as an investment, according to real estate firm DTZ.

DTZ said demand for office space has declined, and the sector is now considered "cold".

It defines "cold" as property that is more than 5 per cent overpriced, with potential yield below expectations.

"Singapore has traditionally been a volatile market, and our rental outlook has been impacted by the global slowdown, resulting in lower expected returns over the next five years," DTZ said in a statement.

It also lowered its forecast for rental growth in industrial property to 3.1 per cent over the next five years.

Read article here.

I have shared in various blog posts why I am heavily invested in industrial property S-REITs compared to office property S-REITs, believing that prospects for the former are relatively better in the next few years.

At current prices, distribution yields for AIMS AMP Capital Industrial REIT (94c) and Sabana REIT (87c) are in excess of 10%. Income distributions are sustainable given the long leases. The REITs also have many months of rental deposits collected as safeguards against tenants defaulting. Balance sheets are relatively strong with gearing levels at 30+%.

It is hard to say if unit prices of industrial property S-REITs would or would not weaken over the next few months. However, it is safe to assume that they are relatively good investments for income.

Added on 16 Dec 2011:
Rents for Grade A office space to fall by 15 per cent in 2012: Savills
Layoffs in several banks have hurt the office market as firms also turn conservative and hold off expansion to save costs.

Related posts:
1. Industrial rents forecast strongest for Singapore.
2. Office S-REITs VS. Industrial S-REITs (2).


INVS 2.0 said...

Hi Ak71,

What about retail REIT? I am invested in Starhill Global and would like to hear from your opinion (if you don't mind my thick-skinness). :D

AK71 said...

Hi INVS 2.0,

Oh, I like retail property S-REITs. I particularly like FCT. Starhill is good too. I was vested in Starhill's predecessor. ;)

I just want to get in when the distribution yields are a bit higher. They are not cheap enough for me yet. :)

Marti said...

Retail have lower yield because long land lease (99 years and sometimes freehold) and not very cyclical. Offices have higher yield because they are usually 99 year leases, and industrial are even higher because they usually have 40 or 60 years leases only.

Let's not forget that a REIT with an average lease of 50 years and a yield of 10% is in reality only paying out 8%, the extra 2% being the equity being returned to the unitholder (asset depreciation).

This being said I like Starhill because it is geographically diversified and has some freehold properties in its portfolio.

Marti said...

Forgot to add that I do own Starhill myself :)

AK71 said...

Hi Marti,

The subject of land leases has been explored and discussed many times before here and elsewhere.

I would say that if we are expecting an industrial property S-REIT to hold the same few properties from IPO till their land leases expire in 30 years and that their properties' values would depreciate in a straight line to zero in that same time frame, then, the idea that industrial properties S-REITs should have higher yields would hold water.

In reality, this is not the case. So, the appeal of this line of reasoning, to me, remains purely academic. :)

SnOOpy168 said...

The leasehold period doesn't really have an impact in my decision. It is the near term yields rates, regular & generous dividends payout that matters. Some cap appreciation would be nice, but seems that prices has often go south. :-(

Picked up some LMIR @ 34.5c, giving > 10% yield pa. OK lah,a BD & X'mas present for myself.

Will relook at Starhill when the yield is more generous. Otherwise, I will keep adding to those high yield REITs.

Merry X'mas & Happy New Year everyone. Double Huat ah. ^-^

AK71 said...

Hi SnOOpy168,

Well, we don't just look at distribution yields when we make investment decisions, of course. However, investing for income, yields are a very important consideration for us. :)

Conservatively, LMIR would probably see 10% distribution yield at 32.5c per unit. This is a retail property REIT with malls in a country where domestic consumption is 60% of GDP. With gearing at less than 10%, further acquisitions using purely debt would bump up its DPU. I definitely like the idea. :)

Drizzt said...

so if yields dont matter if aims property have only 3 year of lease would you guys still buy?

AK71 said...

Hi Drizzt,

Another hypothetical situation? Haha.. You have to forgive me if I give this one a miss.

Drizzt said...

if lease doesn't matter why do we have that in the first place if its just doesn't matter.

AK71 said...

Hi Drizzt,

I did not say it does not matter. Your earlier question was a hypothetical situation which asked us to put yield aside and just consider if we would buy into a REIT (you said AIMS but I am being impartial here) if its properties only had 3 years left to their land leases.

I don't see value in such a question which is why I didn't answer it.

Why don't I see value in such a question? We invest in REITs for income. So a question suggesting a hypothetical situation which would have us not consider yields has no value.

A logical follow through to your question would be that we should buy only REITs with freehold properties because all leases will come to an end one day. We should all just buy Saizen REIT, for example.

Obviously, we are not going to do just that because investing in REITs is a lot more than just looking at the lengths of their properties' land leases, if any.

Marti said...

High yield is easy: just buy assets with very short leases (and hence at depressed valuation). In theory you could offer 100% yield by investing in assets with only 1 year left :p

What is hard is offering sustainable high yield. It's not a surprise that all the highest yielding REIT are also those with the shortest leases... Mr Market isn't so crazy ;)

AK71 said...

Hi Marti,

You have inspired a new blog post. :)

REITs: Leasehold properties.

Drizzt said...

AK, lease hold is not the be all and end all in determining a reit let alone shipping trust and other liquidating stocks.

its just that alot of people take it that it shouldn't matter at all, which i think isn't right.

i am just highlighting that u need to know what u put in your mouth thats all. like what i always say you will always eat that brown rice because u think its healthy when there are properties of brown rice that may impact people of a certain blood type o.

i am not disagree with u ak. its just that i think there should be more emphasis on it.

to end off Ms Teh Hooi Ling have this snippet of an advice from a fund manager

For investors who are keen on Reits and other business trusts, here is some advice from a fund manager friend on how to go about picking the right ones.

'Industrial properties usually have 30-year leases, or 30+30. Assuming a 30-year lease, it means it depreciates at a rate of 3.3 per cent pa, versus one per cent pa for a 99-year lease for a retail or commercial building. So the yields for industrial Reits have to be up to 2.3 per cent pa higher than retail or commercial Reits. Usually however, it is less due to the time discount factor. [Business Times]

AK71 said...

Hi Drizzt,

Yes, I read that particular article too. :)

For sure, what we find in a REIT's portfolio should figure in our investment decisions. This would include the tenures of the properties. We are investing in real estate, after all.

Like I said in another comment, I take issue only with people who give undue emphasis to the shorter leases of industrial property S-REITs. If they were to change tack and simply say that REITs with leasehold properties are typically self-liquidating, given certain assumptions, that is fine by me. For sure, leasehold properties have limited lifespans.

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