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S-REITs' performance in recent times has been nothing short of stellar. I will admit that I am turning cautious on S-REITs and I have said as much in an earlier blog post:
Never lose money in real estate and REITs?
In that blog post, I said I had turned cautious on S-REITs but I had not turned negative on them. This has not changed.
Conditions remain benign for S-REITs and as long as they stay this way, S-REITs will continue to be attractive to yield hungry investors. Money will always go to where it is treated best.
But while Singapore-listed REITs may seem expensive after a rally over the past year or so, they aren’t when compared with equities and bonds, says Tim Gibson, head of Asian property equities at Henderson Global Investors, which manages US$106.7 billion.
REITs are generally required to pay out much of the income from their underlying properties as dividends. Gibson says S-REITs offer the highest yields, both on an absolute basis and compared with the country’s five-year government bonds.
The yield on the FTSE ST REIT Index is around 5.17 percent, while the five-year Singapore bond yields around 0.5 percent and the Straits Times Index’s (STI) dividend yield is around 2.8 percent.
“As long as interest rates remain under control, S-REITs are in the sweet spot to continue their strong performance,” Gibson says.
Henderson’s new Global Property Income Fund will invest around 25 percent of its assets in Singapore-listed REITs.
Source: Dow Jones Newswire.
U.S. Investors are rediscovering their appetite for foreign real estate... putting more money into overseas funds that invest in offices, malls and apartment complexes than they have in six years.
New Jersey's pension fund recently invested US$500 million in a new US$4 billion real estate portfolio that Blackstone Group is raising for real estate investment in Asia.
Commercial real estate provides diversification away from stocks and bonds, and boost income while reducing overall risk because it acts differently than stocks and bonds over time.
Foreign REITs that own top-notch property in many parts of the world tend to be cheaper than those in the U.S.
REITs usually trade at premiums to the value of the real estate they own because investors are willing to pay for the liquidity that REITs offer, and because the value that many REIT management teams can create through acquisitions, developments and superior operations.
Source: Reuters.
Could S-REITs see their unit prices climbing higher? Well, if the reports are to be believed and if S-REITs are viewed as being more attractive investments than REITs in other countries, we could see their unit prices going to a level where distribution yields are much lower than they are now.
Some readers might remember that I mentioned Saizen REIT is relatively inexpensive compared to residential properties J-REITs and, not too long ago, Mr. Market woke up to this fact. Even so, the REIT, at 20c per unit, is still trading at a discount of about 20% to its NAV.
Although I reduced my overall investment in S-REITs last year as I moved resources to certain undervalued stocks, S-REITs remain a big part of my portfolio as I enjoy the relatively high distribution yields they generate for me.
Related posts:
1. Saizen REIT: A brief break through.
2. AIMS AMP Capital Industrial REIT: Making money.
3. 2012 full year passive income from S-REITs.
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14 comments:
Hi AK
I can see you hv been gradually reducing your position in REITS and adding positions in others such as China Minzhong or Wilmar. Looks like its a calculated risk reward move :)
When a lot of people generally believe that something is a sure thing and that risks are reduced; ironically that is probably the time when prospective returns are low and risks have heightened considerably!
Hi B,
Well, to be honest, I am not trimming my positions in S-REITs by very much. The exception is LMIR.
I have been adding to my longs in China Minzhong, Wilmar, Sound Global, MPM etc. because I see value. I can only hope that I am right. :)
Hi MW,
Well, although I will advise caution, I will also say that high could go higher. Until a time when conditions are no longer benign for S-REITs, I will stay invested.
Hi AK,
Most of the reits are now trading at or above their 52 weeks high.
First reit had even double in price from her IPO.
In a dilemma whether to sell half or to use a trailing stop.
Hi goldmansion,
Well, there is nothing wrong with locking in gains, of course. :)
We really have to ask ourselves if they are still worth loving. ;p
The decision to divest or hold will also depend on your holding. Small holding of less than 10 lots doesn't really make any different. But if you are holding 100 lots and in profit, no harm to take a hair cut of 20-30%.
For me it is still a hold as my holding is not big. I am also not buying anymore as I find better value in buying blue chip like capitaland which was trading below its NAV of 3.50 a few weeks back.
AK, again a very timely post as people had asked me this question before about REITs. S-REITs are still a buy if you are comfortable with the yield and the underlying assets.
Hi seefei,
We will all have to make our own decisions ultimately. As long as the facts and reasoning we based our decisions on are sound, we should be OK. ;)
The Biggest Risk to owning REITS as I read it is interest rates adjustment to the upside.
The reason being financial cost is one of the major costs for REITS. Any slight adjustment to the upside of the rates will result in a major upside of financial cost for the REITS.
How's the inflation in SG?
Is it tame or do you see it rising anytime soon?
Hi JCK,
Inflation has been on the high side in Singapore but you have to remember that we have no control over interest rates in Singapore. We "import" our interest rates. As long as interest rates stay near zero in the USA, so will ours.
Hi AK,
Are you able to give an indication of what percentage of your portfolio are REITs vs Stocks? Eg.. 40% Reits and 60% Stocks..
Thanks.
Hi K,
I don't think it is useful to anyone to know this. Do what feels comfortable for you. :)
Hi AK,
The question I am trying to answer in my head is that if I believe interest rate will increase in the next two years; it would make more sense for me to accumulate stock rather than reits? All things being equal rise in interest rates would put more pressure on Reit prices than Stock prices?
Hi K,
Generally, with rising interest rates, it is true that we expect REITs to be under pressure because they are financially leveraged.
However, we want to remember that rising interest rates will put pressure on all entities with a lot of debt in their balance sheets. If a REIT is able to improve income in the face of rising interest rates, they could continue to do quite well. ;)
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