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S-REITs: Are we asking the right questions? (UPDATED)

Tuesday, June 11, 2013

A friend asked me if S-REITs are bad investments now? Why are people selling down S-REITs? 

He is somewhat concerned about his investments in S-REITs and was hoping that I will tell him what to do, I guess.

Well, I cannot and will not tell him what to do. He has to decide for himself. 

Before he can decide for himself, he has to understand his motivations for being invested in S-REITs in the first instance.

If his motivation was for income, then, ask if S-REITs still do a good job of providing regular income. 

If his motivation was for capital gain, then, he should have set a target and perhaps sold his investments when prices declined by 10% from the top, for example.

People get confused when they don't know what they want.

For me, my remaining investment in S-REITs is for income. 

Apart from Saizen REIT which could see income distribution in S$ affected by the much weaker JPY, I do not see income being affected negatively in the other S-REITs I am vested in. 

Well, at least not in the next few quarters.

So, why are people selling down S-REITs? 

There are many explanations and there has been much said about how sensitive S-REITs are to interest rates. 

An increase in interest rates will be bad for S-REITs in more ways than one. 

This is all true. 

However, we have to question also if an increase in interest rate is imminent and also if S-REITs will be immediately affected. 

Personally, I do not think so.

Of course, Mr. Market does not care what I think. This is a good thing. 

As Mr. Market goes into a manic depression, he is going to offer S-REITs at lower and lower prices. 

This means distribution yields will go higher and higher, everything else remaining equal.

Could we see S-REITs trading below NAVs once again? I have no idea but it could happen. 

If it should happen, we would have a chance to buy productive real estate at a discount once again. Guess what would I do then?

As S-REITs' unit prices climbed higher, I warned that we should be careful and not be too optimistic. 

Now, as S-REITs' unit prices decline, I will remind everyone not to be too pessimistic.

Always ask the right questions and we will know what to do.

Related posts:
1. Wealth creation in the stock market.
2. Never lose money in S-REITs?
3. Be cautious when climbing the S-REIT tree.


AK71 said...

To all readers,

I will be going away for a few days. I might not be able to check my blogs or if I do, I might not be able to reply to comments in a timely manner.

Most probably, I will not have the time or energy to blog for a while but I will be back. ;)

MaxiBom said...

Have a safe trip Ak , looking forward to your next post

AK71 said...

Hi MaxiBom,

Thank you and I will blog again soon. ;)

JCK said...

"People get confused when they don't know what they want."

Guilty as Charged! :)

Have a good journey!

Cory said...

Your post is timely. Have a safe trip.

Anonymous said...

Hi AK,

Thanks for the S-REIT tips. So what counters are you monitoring right now? What are your target buying prices?

Thanks and enjoy your holiday!


AK71 said...


Well, we are all greedy people to a point. ;)

Of course, on hindsight, it would have been better to sell and buy now at lower prices. However, that would only mess up our emotions and achieve nothing else.

Instead, remind ourselves why did we invest in S-REITs in the first instance and what would we do in the current situation. :)

AK71 said...

Hi Cory,

Thank you. :)

I pray for a safe trip too. I don't like taking airplanes.

AK71 said...

Hi Vanson,

Which counters? Clue: I blog about them many times.

Target prices? I gave a strong hint in this blog post. However, remember that what I am comfortable with might not be so for you.

Some people might be quite happy to have an 8% yield and buying slightly above NAV but some might not be, for example. ;)

Time for you to do some sleuthing.

This is a working trip. Not a vacation. Not looking forward to it but thanks for the well wishes. :)

coconut said...

me too! i hate airplane haha. i had this feeling of getting into a coffin when i board a plane!

and i'm starting to accumulate reits, i'm now your faithful follower! but i do hope the market will tank much more so i can get them cheaper, sorry about that.

AK71 said...

Hi coconut,

Why are you apologising?

I also want more people to short S-REITs so that I can buy cheaper from them. ;p

coconut said...

count on me!

coconut said...

actually i did short some reits, but now i find myself covered more than my shorts.

i invested accidentaly haha...

AK71 said...

Hi coconut,

I hope not all shortists are like you. I need them to build up big short positions. ;p

coconut said...

so that they will push the price up much faster when they start running for cover! you smart!

AK71 said...

Hi coconut,

I not smart. The people like you who made money in the current correction are the smart ones. ;)

coconut said...

haha AK! if only i can achieved half of how you can sit tight with your investment, i will be truly happy with myself.

as far as trading goes, i can only manage to pick little here and there, nothing great about it. i'm not those high flyer traders who make or lose millions.

AK71 said...

Hi coconut,

I have a weak heart. Win millions? Good! Lose millions? Die lah! No, no, cannot. Hahaha... ;p

OK, this is probably the last comment I can reply to. Time to fly. :(


JCK said...

Being a devil's advocate......another angle

"Part 2: Cap rate compression/expansion

FCT FY12: Portfolio valued at $1.816b with a Weighted cap rate of 5.54%. On the way down, it's great. By reducing the cap rate of Northpoint by just 15 bps, there was a gain of $36m in 2012. If, for whatever reason, holding everything else constant, the cap rate increases to 6% (an increase of 46bps), you see a negative valuation surplus of $138 million.

It is just financial engineering. Check the cap rates of ALL the reits over the past 3 years and see how much the assets have been revaluated due to a 'smaller base' effect. "

Anyone can explain the relationship between valuation and Cap rates?

ryan said...

Hi AK,

You mentioned about motivations for being invested in S-REIT. But for those who bought S-REIT in Apr / May this year, their capital gain have all been eroded by sell downs these few days.

Isn't losing 10% of your capital (for example) equivalent to collecting dividends for 2-3 years? So, capital preservation is also equally important besides income. What's your take on this?

seefei said...

i said it before, and i am saying it again... the possible increase in interest rate is due to the strengthening of the economy. Or rather what the Fed perceive and hence the warning of easing of QE3. With a stronger economy DPU may not be going south, as upward reversion of rate can happen. How these two forces play out, we will have to see how the market and REIT adapt to these new environment. AK, is right you have to see what is your motivation? If i buy a reit for its yield of 7% and its price drop but DPU maintain, the original objective is still being maintained. We cannot ignore market noises but we also cannot over react to it.

AK71 said...


Cap rate is short form for capitalisation rate. It is the rate of return from expected income from a property.

Take the NPI (net property income) and divide it by value of property and we have the cap rate. Sometimes, I talk about NPI yield and this is it.

The blogger's language is somewhat confusing to me. However, if I were to try to decipher his writing, he seems to be talking about yield compression.

Simply put, for unit prices of REITs to go up, yields have to compress, all else being equal.

You could post a comment in his blog and ask him to clarify. I could be mistaken. I just got back to Singapore a couple of hours ago. I need some shut eye.

AK71 said...

Hi ryan,

Motivations are important because if we do not know why we are investing, we cannot come up with a consistent strategy. In the end, we get a bit lost or very lost.

For people who would like to invest for income, REITs are relevant instruments. However, getting in with a margin of safety is still the prudent thing to do.

If for some reason, someone bought some S-REITs just before the current correction, it is definitely unfortunate.

Should they have employed cut loss? Or should they think of averaging down? This is really their call.

Do they still believe in the investment? Is it fundamentally still sound? Was buying at the prices they bought a mistake?

Ask the right questions and we will know what to do. :)

AK71 said...

Hi seefei,

Well, I don't want to let readers get the wrong idea and rush in to buy S-REITs in a big way but I do feel that Mr. Market is overly pessimistic and that S-REITs are oversold.

The Fed is thinking of slowing down the money printing machines. They are not stopping or reversing the process. Monetary policy is still expansionary.

The Fed will not increase interest rates until unemployment drops to 6.5% in the USA and, iirc, it is now 7.6%. Quite stubborn. If the Fed keeps interest rates at near zero, Singapore's rates will follow.

In a blog post, I said that I was no longer optimistic about S-REITs with their recent lofty prices but I was not pessimistic either.

Now, with much lower prices, I am beginning to see value once more. :)

INVS 2.0 said...

Bought Maco Polo at $0.375, thanks to this market correction. :/

AK71 said...

Hi INVS 2.0,

That is buying at a 15% discount to NAV. Good on you! :)

Tien Song Chuan said...

How do you obtain the NAV of Marco Polo Marines? What is the difference between asset value and book value?

AK71 said...

Hi Tien,

See page 8 of their latest financial report:
2Q results dated 9 May 2013

AK71 said...

Bernanke said scale-backs in the asset purchasing program will only happen if the economic data gets better. Interest rate hikes, he said, are a separate issue and "still far in the future."


CL said...

About NPI yield, does a lower yield represents a bad location?

AK71 said...

Hi Chris,

Net property income (NPI) is the income a property receives after deducting all operating expenses.

The NPI yield would be NPI/purchase price of the property.

Now, is NPI yield a function of location?

You tell me.

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