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Is investing in REITs right for you? (Rights issues hit 56 year old investor.)

Thursday, October 5, 2017

Reader said...
Dear Mr. AK,
I am 56 and I started investing last year. I invested heavily in reits because of the higher yields and belief that they will fund my retirement.

However, I have been hit by a string of rights issues including the recent one from cache logistics. I don't have much spare cash and I am not prepared for these.





Now, I wonder if I made a mistake in using my cpf money to invest in reits too.

My brother in law told me that reits will take back all the money they give out as dividends and sent me a newspaper article on the topic. 

I read your recent blog on your impressive passive income from reits. You are an expert on reits.

Could you help to shine light on this matter?








AK said...
(Reader attached the newspaper article "The REIT myth busted" in the email to me.)

The article generated plenty of discussion many years ago because REITs sank during the Global Financial Crisis and many REITs required capital injections to stay afloat.


I am sure there are many who were burnt and many who still do not believe in REITs.


I have some scary stories from those days which I can tell too.






Horror stories aside, however, I believe in being pragmatic and that all investments are good investments at the right price. 


We have to find the right tools to do what we want to do.

In my opinion, REITs are relevant to investors for income.

Having said this, as REITs distribute most, if not all, of their income to their investors, it is only natural to expect some form of fund raising if they are to grow.


So, should you stay invested in REITs?


Read these blogs first:


1. http://singaporeanstocksinvestor.blogspot.sg/2011/10/reits-and-rights-issues-dilutive-or-not.html


2. http://singaporeanstocksinvestor.blogspot.sg/2011/11/reits-and-rights-issues-singaporean.html






I hope they provide some of the light you are looking for.

To invest in REITs, it is important to be prepared for possible rights issues. Investors should be able and willing to deal with this possibility.


With this in mind, you have to decide if REITs are right for you. I cannot decide for you.


Related post:
3Q 2017 income from REITs.

8 comments:

Spur said...

Hi AK,

With Halloween coming up, perhaps some whispering of a horror story or two might make for good reminders to enthusiastic investors. :) :)

It's almost a given that REITs & Biz Trusts will be calling for cash injections whether by rights issues or loans during bad recessions in order to strengthen balance sheet or repay debts. And when times are bad, banks are loathe to loan & bonds can only be offered at punishing coupon rates. Hence the importance of gearing levels & amount of maturing debts over the next 12-24 months. That's why govt imposed the 45% gearing cap after the GFC issue.

During GFC the problems originated mainly in US & Western Europe yet still impacted credit flows & confidence in the finance sector here. Imagine if problems were to originate in Asia or ASEAN similar to Asian Financial Crisis. That'll be a real interesting horror story! Hohoho!!!

AK71 said...

Hi Spur,

I thought "hohoho" is for Christmas? ;p

GFC was a credit crisis of epic proportion.

There is speculation aplenty on what the trigger for the next bear market is going to be.

Whatever trigger it is going to be, I have no doubt that the crash will be quite spectacular. Good enough for Halloween. :p

Goh said...

If a person does not have spare cash for a rights issue, why not:
1) Sell some shares before the extra rights date
2) Use the cash raised to subscribe for the rights

-Or-

Sell all shares before extra-rights

-Or-

Sell off the null-paid rights to get some compensation to make up for the dilution

K said...

Hi AK,

Can you share what hospitality reits you are holding or like? Read in the papers today that occupancy is on the rise, I suppose that is good for Reits in the coming quarters?

Thanks.

AK71 said...

Hi Goh,

If unitholders sell during before XR, they will lose their rights entitlement.

To sell nil-paid rights, it would depend on whether the rights issue is renounceable.

I always say that we should have a war chest ready. It is useful in more ways than one.

AK71 said...

Hi K,

You might be interested in this blog and the related post:
Ascendas Hospitality Trust.

Ian Low said...

Its so easy to solve your reader's problem.

Sell some shares of his other reits, to subscribe for the rights issue.
Further more, started investing last year and selling now is likely to take profit.

Problem solved.

If he is willing to take risk, and dont want to sell, move the shares in margin account to subscribe for rights and excess using margin. Make the difference between dividend payment and finance fee.

AK71 said...

Hi Ian,

Even if he is willing to take risk, at his age and with a weak personal balance sheet, he should think twice about using a margin facility.

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