REITs: Leasehold properties.

I have had quite a few exchanges with readers regarding REITs and their properties' land leases, if any. Readers who follow the comments section of my blog would be aware of this.

After a while, I realise we could just be running through the same points again and again. So, I am putting up my thoughts in a proper blog post written as a reply to a comment by a reader, Marti:

Hi Marti,

Yes, land leases should not be looked at in isolation. Like you said, if shorter leases are coupled with very high yields, they could still make great investments.

So, properties with shorter land leases if for any reason should be in great demand could command higher rents while freehold properties if for any reason should be lacking in demand could have lower returns. So, investing in the former might make sense as there is also time value of money to consider especially if the difference in yields is stark. We get back more money in a shorter period of time instead of a dragging out of much smaller payouts (although we could receive them forever).

So, if a property has say 15 years left to its lease but is able to generate a 20% return per annum, it would still make a fairly good investment. In situations where people feel that it makes more sense to rent than to own properties, this could come to pass.

I don't think an argument that REITs with properties with shorter land leases should offer higher yields to make investment sense is a persuasive one unless we assume that the managers do nothing to their portfolio of properties under management from IPO to the time their properties' land leases run out. How likely is that?

REIT managers will very likely divest older, less productive properties and acquire newer, more productive properties. They will very likely, conditions permitting, undertake development of properties and have AEI. Asset renewal keeps overall age of leasehold properties younger while development properties and AEI improve distributable income, all else remaining constant.

The issue of whether REITs have leasehold or freehold properties and their implications is not unimportant but I feel that it could have been given too much prominence in some quarters and by some people at the expense of a more holistic approach in the analysis of REITs.

We want to keep things simple but not simplistic.

Capitaland: Rising MACD in weekly chart.

I look at weekly charts when I am interested in the longer term technicals of a particular stock. I got more shares of Capitaland at $2.35 not too long ago. Its price hit a low of $2.25 so far today.

However, as my motivation for being invested in Capitaland is because of its cheap valuation, I am not too concerned with short term price weakness. Of course, I might do a bit of trading if I could make some extra money on the way.

With this in mind, I looked at the weekly chart earlier. I found that the MACD is rising as price weakens. A positive divergence.

Also, up till now, this week's volume has been relatively low compared to last week's. We need to see how things pan out tomorrow, the final trading day of the week.

Connecting the lows of the weeks of 22 August and 3 October gives me a trendline which suggests that there could be support at $2.16 if the counter should go that low in price this week or next.

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

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).

Hyflux: Continuing downtrend.

My recent decision to go long in Hyflux has turned out poorly. It was a decision heavy on TA and almost nothing FA wise. So, should I cut? Regular readers know that I do not like to cut as prices are declining.

Prices go down a river of hope and I would like to cut on rebounds and if prices should test resistance. If the opportunity does not present itself, then, it is another stock for the freezer.

I have always liked Hyflux's business but in the last crisis, I chose to invest in E-pure instead for its less demanding valuation. Some told me that Hyflux would be safer as E-pure was an S-chip. We are probably all affected at the subconscious level in the same way.

In the last crisis, Hyflux touched a low of $1.11 in October 2008. Today, this low has been taken out.  Does this mean that Mr. Market feel that Hyflux will do a lot worse compared to the last crisis? It does seem to be the case.

Despite all the concerns raised regarding Hyflux's debt, its numbers are still pretty good.

Net margin:
13%. This is a good business.

Net gearing:
0.1x. Concerns regarding Hyflux's debt overdone perhaps?

Contributions from Tuaspring Desalination Plant to start in FY2012.

See slides presentation 3Q FY2011: click here.

Technically, Hyflux is in a downtrend. Looking at the chart, the very long term support would be at $1 (a many times tested support back in 2002) and $0.86 (the low of 9 Sep 2002). Would these be tested in time? No one can say but if they should be tested, they would be buying opportunities.

Right now, $1.065 is immediate support provided by the 123.6% Fibo line. A stronger support would be at $1.015, the 138.2% Fibo line and a golden ratio.

AIMS AMP Capital Industrial REIT: Accumulate on weakness.

I bought more units of AIMS AMP Capital Industrial REIT today at 93.5c. 

Price touched a low of 93c on relatively high volume today. In the following days, if selling pressure does not let up, we could see the next support at 92c tested. That would bring us back to price levels not seen since December 2009.

Although the MFI and Stochastics both suggest that the REIT is terribly oversold, in very bearish circumstances, price could continue to drift lower with momentum oscillators remaining in their oversold territories.

If price should go lower to test 92c, I would like to see the MACD forming a higher low. This would hint that downside momentum has weakened. It would also give us a positive divergence.

The redevelopment of 20 Gul Way is NPI yield accretive and because it is funded fully by debt, it is also DPU accretive. It is estimated that contributions from the redevelopment will start from 1Q 2013. 

By early 2014 when both phases of the redevelopment are generating revenue, the management expects a positive DPU impact of +1.465c, everything remaining equal. This would mean a pro forma DPU of 11.465c or a distribution yield of 12.26% based on today's closing price of 93.5c per unit.

We could see continuing weakness in the REIT's unit price if sentiments remain bearish. I would capitalise on further weakness to accumulate as I could find nothing wrong with the REIT's fundamentals.

See slides presentation regarding progress in the redevelopment of 20 Gul Way: click here.

2011 full year passive income from S-REITs.

On 7 Dec, income distribution from AIMS AMP Capital Industrial REIT was received. It was also the final income distribution to be received from my portfolio of S-REITs this year.

Total income distribution received in 4Q 2011:
S$ 29,040.65.

Add this to S$ 75,785.49 received in the first three quarters of 2011, the grand total for the year 2011 is S$ 104,826.14.

I received more income this quarter because I made use of the weakness in the stock market to accumulate more units in selected S-REITs.

I have imperfect knowledge definitely and I can only try to do the best with what I know. I don't spend time asking questions which I cannot reasonably find answers for.

As many may already know, it was after much deliberation that I decided to share in dollar terms the passive income I am receiving from my investments in S-REITs. From the flood of comments I received in my last blog post on the subject, I guess readers do appreciate this candid sharing.

However, I doubt such a blog post serves any other purpose than to show what is achievable if we put our minds to it. The message is really simple and it is meant to inspire.

So, don't be surprised if I do not do another blog post like this in 2012 since I do not believe it would be more useful than this or its predecessors.

Once again, if you need a little encouragement, remember, if AK71 can do it, so can you! Bookmark this page if you think it helps. Add oil!

Related post:
$120k annual passive income from S-REITs next?