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Made and still making money from S-REITs.

Saturday, September 29, 2012

In an environment of very low interest rates, S-REITs are logical beneficiaries and in more ways than one. Regular readers would have heard this many times already. Readers who are new to my blog might want to read some of my older blog posts on S-REITs and why they are expected to continue performing well.

When we invest in S-REITs, it is with a primary aim of receiving regular and meaningful income. I have also said that any capital gains would be a bonus.

The outperformance of S-REITs' unit prices has led some holders to wonder if they should divest. Well, as market wisdom goes, taking profit is never wrong. However, I would ask that these holders consider if they have better places to park their money. Remember, money will go to where it is treated best.

In economics, we learn about supply and demand and how prices are affected by the relationship between the two. S-REITs are seeing their unit prices rising strongly because more investors are now putting their money in S-REITs.

In the last two years, I have had readers from Malaysia, Hong Kong, Europe and the USA writing to me. The early movers into S-REITs are sitting on some very nice capital gains and receiving regular distributions with yields as high as 10+% in some cases. What's more? Their investments have seen forex gains as the Singapore Dollar continues to strengthen against their home currencies!

I kid you not when I tell you that these readers are all very much richer than I am and have made much more money by being in S-REITs although they came in somewhat later. I am happy with how well things have turned out for their investments in S-REITs.


When Pat (a cboxer in Bully the Bear) told me that I have a pool of funds, I told him I know well that what I have is merely a puddle. Having self-knowledge and knowing what I have achieved is humble, I am not fixated by how much I have versus how much others have. Of course, I am only human and it used to bother me when I was younger.

Instead, just like starting a business, we should have a model for wealth creation. Being fixated with how much wealth we have versus how much others have does nothing to grow our wealth.

For someone who is investing in the stock market for income, first, have a clear goal and that, to me, should be to create meaningful passive income streams which will fully replace our earned income. Pick out likely candidates and do the due diligence to decide on the ones which are likely to help us achieve our goals.

Next, have discipline. Stay the course. Yes, stick to the plan. If circumstances have not changed, why deviate from a good plan? However, what if they did change? Then, ask why was our plan a good plan. If the reasons for the plan being good no longer exist, it is time for a change, isn't it?

Maybank Kim Eng, 28 Sep 12:

Year-to-date, we have seen many pension, insurance and income funds switching into REITs to pursue higher returns for the sheer fact that the yield-curve is almost flat.

 This is further aggravated by the almost "zero-bound yields" which meant that yields have no more room to fall, erasing any prospects of fixed income capital gains for investors. In the quest for returns, many such funds had to turn to slightly riskier asset classes such as REITs for stable recurring distributions.

 We believe that with the latest round of QE3 Infinity, ECB’s unlimited bond-purchase program and BoJ’s yen-asset-purchase program, coupled with the low interest rate environment and a yield-spread of 440 bps over the 10-year government bond with low earnings risk, would warrant further yield compression of 56-73bps, translating to 11%-14% upside for the S-REITs sector.

Link: here.

Now, is investing in S-REITs still a good plan?

Related posts:
1. Investing in REITs: A flawed strategy?
2. Staying positive on S-REITs.
3. Mr. Market is always right.

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32 comments:

AK71 said...

o The MAS manages the Sing dollar's strength by buying or selling currencies to keep its exchange rate against major currencies within a policy band, and by adjusting the band occasionally to steer the exchange rate. This FX-centred monetary policy regime means that Singapore's short-term interest rates are essentially a function of US short-term interest rates.

o The strong SGD, chasing yields climate and lack of investable alternatives in the market are other factors providing price support for S-REITs. Investors are also drawn to the transparency and predictability of S-REIT dividends, particularly in the midst of the external market uncertainty

Dividend Warrior said...

Hi AK,

I am vested in Sabana recently. Looking forward to the distributions in October. ^^

Low interest rates FTW!

AK71 said...

Hi DW,

Sabana REIT is one of my two biggest investments in the S-REIT universe. It has been very good to me. :)

FTW indeed! (ahem, I had to google for the meaning of this acronym)

Ah John said...

Although making money, I still wish price to drop. As price goes up, harder and harder to make decision to buy.

AK71 said...

Hi Ah John,

I think you are not the only one. So, you can imagine that if unit prices were to fall by just a small fraction, funds waiting on the side would rush in, providing support.

People could opine that unit prices will go higher or lower. They are welcome to do that. Personally, I don't really bother. Why? I don't have a working crystal ball! What is more important to me is to know what to do in specific situations.

If prices go much lower, I could buy more. If prices go much higher, I could consider selling some.

Like how SMOL puts it: "Tok, tok, tok..." ;)

Ah John said...

At this point, I think we should leave REIT aside for a while, but think what will be better sector to look in. Eg. SPH?

SnOOpy168 said...

in all cases, I have to thank AK & his efforts on writing up in details about the REITs. Made me feel very shoik quarterly see all these passive income floating in.

Wished I had started much earlier but then, better late than never

Looking toward your next insight on REITs and all things passive income.

Huat ah...

AK71 said...

Hi Ah John,

S-REITs' higher profile in the global market will attract more foreign investors and that could really push prices even higher. However, I am happy with my current core investments in S-REITs and will not be adding.

SPH and other high yield stocks have similarly been chased much higher. The last time I bought some shares of SPH was at $3.55. Not adding at current prices.

Now, I am indulging in some hunting activity, looking for possibly outsized capital gains in the next few months. ;p

AK71 said...

Hi SnOOpy168,

You are welcome. You are always so polite. :)

I am happy to share my research, my beliefs and what little I know. You decided for yourself that I made sense. ;)

I like to think of passive income as streams and that they are flowing into my bank account. Like water, you know. Floating is so eerie. hahahaha... ;p

SnOOpy168 said...

I wrote floating ah ? Opps, I mean flowing. Thats what happen after a loooong flight. Mind not working.

LCF said...

Hi AK,
Do you want to consider putting a FB share button under your post? Your article and philosophy are epic sh*t ,and I want to share it in my FB page.
Cheers,

AK71 said...

Hi SnOOpy168,

I guess your mind could still be floating high up in the sky. Haha.. I really dislike long flights. Even flying to Hong Kong feels a bit too long to me these days.

AK71 said...

Hi LCF,

A FB share button? Hmmm... I will have to find out how to do that. I am not a very tech savvy person.. Thanks for the pointer. :)

AK71 said...

Hi LCF,

Found the instructions on Facebook's website. Took me a while to figure out the code, insertion etc. I hope I have done it correctly.

Let me know if it works. Thanks. :)

pie said...

Hi AK71,

any recommendation for any counter? esp REIT?

anywaym you can email me agentforalipay@gmail.com
or just leave a comment here

FoodieFC said...

I have been comtemplating whether to sell off my sabana reits for quite sometime, ever since it rose to 1.05. After thinking for sometime, I decided to hold as there's no where else to park this money that can give this return.

I wonder when will reits start dropping again.

JCK said...

A question on land lease periods of the assets.

How are the diminishing periods of the leases captured in the accounts of REITs?

Are they amortised?

AK71 said...

Hi pie,

I wouldn't recommend anything as I am not a qualified financial planner. ;p

You must firstly know what you want out of your investments and zoom in on instruments which could help achieve your goals.

If you are looking at REITs, the assumption is that you are interested in investing for income. If that is the case, start going through some REITs and their fundamentals and see which ones you are comfortable with.

There are fellow investors in S-REITs who will never invest in some S-REITs which I like. We are all different. Don't simply follow. :)

AK71 said...

Hi FoodieFC,

If you go to my blog post titled "Staying positive on S-REITs", you will have an idea when to become negative on S-REITs. ;)

AK71 said...

Hi JCK,

I doubt they are.

I have mentioned before that a 60 years leasehold property bought 20 years ago could actually be worth more now although it might have 40 years left to its lease. Valuation is very much a function of market forces. This revaluation will be reflected in the REIT's balance sheet.

One thing that the REIT manager should do is to constantly rejuvenate its portfolio of properties by selling away older properties and acquiring newer and better quality ones.

JCK said...

What i was getting at whether
the winding down of the lease period 'should' end up as a cost for the REITs?
Essentially,is paying a price for an asset with limited lease period paying for the lease?
In Peninsula Malaysia, most land are freehold to perpetuity.


i would assume that as the lease gets shorter, the value of the assets would depreciate?

Can you enlighten us what happens when leases expire in Singapore?

Thanks

AK71 said...

Hi JCK,

Conservative investors should factor in shortening land leases as a cost.

Although it seems counter intuitive, value of leasehold real estate in Singapore might not actually reduce over time. Logically, an asset with a 60 years lease should depreciate at 1.66% per annum and its value becomes zero as its lease expires but this is a crazy world we are living in and Singapore is crazier than most places. ;p

When land leases are close to expiry, applications could be made to the relevant authorities to have leases extended for a fee. Indeed, we have seen how 99 years leasehold properties had their leases topped up by developers who bought them for redevelopment.

JCK said...

Hi AK

Thanks for the response.
In real accounting terms, i hazard a guess that the "upfront" rental paid for the lease should be amortised as an expense to the REITs biz.
Otherwise one cannot account for the expiry.

How much are the fees to be Paid for the extensions?

So again in accounting for this, the company may have to provide for these fees in anticipation.
Thats another expense provision, no?

Disclaimer: i aint no accountant! :)

AK71 said...

Hi JCK,

I am not an accountant either and, perhaps, there will emerge from our midst someone who is able to enlighten us further. :)

In the meantime, you might wanna see:

REITs: Leasehold properties.

Some very good comments from readers here.

psonya wil said...

Hi AK71,
I have been following your blog and have benefited from your advice and analysis.
I am 36 this year and I have doubled my portfolio size since I followed your blog 4 years ago. My portfolio is approaching a million soon, largely thanks to your blog.
I am currently only invested in 4 counters, namely First Reits, Cambridge (not one of your favorite but one of my bigger profitable contributor), AIMS and Sabana.
Just want to let other followers know that despite the fact that I follow your blog, I also do my own homework before hitting the button. Bloggers like you helps me narrow down the list of potential target but the final buy decision is mine and only mine. That explains my purchase in Cambridge. Hence, any profits or losses; the final decision to buy and sell, is solely my responsibility and not others. (I am writing this as I have seen people blaming bloggers for their own mistakes.)
All of these have earned me more than 100% but other minor mistakes, due to not fault of yours, have reduced my overall profits.
One thing I want to share with your followers is: Despite the recent run up in REITS's price, I am still holding on. Like AK71, I don't have a crystal ball and I don't know if Mr. Market decides to offer me a discount tomorrow, but I am a follower of the underlying trend. I always have a 5-10% moving stop loss that I apply to all counters. I only sell after the price have dropped 5% - 10%, depending on how much margin I have for that counter since my last purchased.
Is that a sound strategy? That seems to adhere to the advice of win big and lose small. There are always other opportunities when you have the capital.
Even now, I am keeping 15% in cash just in case the Mr. Market decides to offer just that opportunity I am waiting for.
What is my biggest worry now? I don't think I am able to repeat the same performance going forward. The chances of prices going up another 30% is slim I guess. Having said that, one can never really know and I hope I am wrong.
Will we see REITS yield going up to anywhere near 10% again? Unlikely is my best guess. With most REITS trading near or above NTA, the golden days seems to be over. With the foreign investors hopping on the bandwagon, prices are more likely not to move down much further. But is the reserve true? I.e. will the prices move only up? I will need a crystal ball for that. But the fact is, at todays’ price, the margin of safety has diminished tremendously. Gone were the days when I can be almost sure that my purchase will earn me a positive return in medium and long term.
Going forward, it seems like the only logical thing to do is to preserve my profit and ensure I have sufficient capital to partake in such Golden opportunities when Mr. Market decides to offer it. Let’s hope that I wouldn’t miss that chance. Perhaps, I should also review my stop loss in view of the current situation.
Oh no…. my comment seems to be longer than I have intended. Let me thank you for sharing your thoughts and analysis in your blog. I have always wanted to thank you when I see a nice article but always failed to do so. But excuse is an excuse.
Thank you so much AK71. Please continue to share and may all your trades are profitable.
Psonya

P.S.: I made a terrible mistake on First Ship Least Trust that almost wipes out half of my capital. God forbid me make such mistake again. Greed is something we have to guard our self from.

AK71 said...

Hi Psonya,

I am very happy always to hear from readers. I am especially happy to hear from readers who have been following my blog since its early days but have remained silent.

If I should get a comment a day from silent readers, sharing with me their stories, I would never be bored. So, don't worry about the longish comment. I enjoyed every word. Thank you.

AIMS AMP Capital Industrial REIT, Sabana REIT and First REIT have been great investments so far. As for Cambridge Industrial Trust, I don't have an issue with it. I am more concerned about who is helming the management. ;)

I did, however, say that Cambridge Industrial Trust was worth another look a year ago:

Cambridge Industrial Trust: Worth another look.

First Ship Lease Trust sank about 1% of my funds. Well, I look at it as fees for a lesson from Mr. Market, a lesson which I shared with many.

Thank you for the well wishes and I will try to remember what you said about winning big and losing small. My ill-fated decision to invest in Wilmar is my biggest money losing position now. Indeed, God forbid me from making such a mistake again. :)

Drizzt said...

if it doesn't matter i wonder why people keep asking the questions. renewal of lease can be cost under asset enhancement initiatives, which package the renewal together with the renovation or extension. you will not know the actual cost but you can check up URA site for estimation figures.

Under accounting they could have cost this two ways as capital expenditure for existing asset fixed up or capital purchase under expense in the income statement.either way results in skewed income or free cash flow statement.



Note: not an accountant.

AK71 said...

Hi Drizzt,

Thanks for sharing your thoughts. :)

LCF said...

Hey AK, the FB Like button works. Though not exactly the FB Share button I have in mind, but that could be blogspot limitation. Cheers

AK71 said...

Hi LCF,

It works? I am glad. :)

I don't even know there are different types of FB share buttons and I definitely know nothing about blogspot limitations. It is a miracle that I managed to put it up at all. ;p

AK71 said...

UOB KayHian stays Overweight on S-REITs despite their year-to-date surge as yield compression toward long-term spread levels implies another further upside.

“S-REITs continue to offer a convincing risk-return ratio, with a yield-spread of 4.6% over the risk-free rate,” it says, adding “S-REITs’ yield spreads remain the most attractive in the region and coupled with the low interest rate environment and a strong Singapore dollar, makes a compelling case for the continued outperformance of the S-REIT sector.”


Dow Jones & Co, Inc
Tuesday, 16 October 2012

AK71 said...

Citigroup tips S-REITs over developers as it initiates coverage of the Singapore property sector.

“On the back of QE3, we believe interest rates would remain low near-term, which would continue to drive investor appetite for yield plays. Low bond yields, stable money markets and a strong Singapore dollar could all serve to keep investor interest in S-REITs healthy near-term and continue to drive yield compression. We believe forward DPU growth supports the sustainability of the yield compression cycle.”


Dow Jones & Co, Inc
Tuesday, 16 October 2012

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