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Be cautious while climbing the S-REIT tree.

Sunday, June 2, 2013

In the last few years, I have stayed positive on S-REITs and reaped the benefits. In a blog post just a few months ago, I said that I was no longer as positive about S-REITs but I had not turned negative on them either. 

Instead, I was quite simply cautious about S-REITs as investments for income. See: Never lose money in real estate or REITs?

To recapt, at that time, AIMS AMP Capital Industrial REIT was trading at $1.46 a unit and Sabana REIT was trading at $1.12 a unit. Fundamentally, if nothing has changed in the businesses of these REITs from then to now, if I was cautious then, I would still be cautious now. 

This is why I have not added to my long positions even as prices retreated from the highs of $1.88 for AIMS AMP Capital Industrial REIT and $1.385 for Sabana REIT.

I am still invested in the REITs because I would be hard pressed to find alternative investments that would give me the returns that they do. This reflects my thinking that in the shorter run, these REITs are still good investments for income.

However, there is no doubt in my mind that, just as the REITs enjoyed the good fortune of the real estate sector in recent years, they will also suffer the downturn that is sure to come. So, to add to my already sizeable investments in these REITs is not a good idea.

I revealed in my year end report for 2012 that I had started moving resources away from REITs into what I felt are undervalued stocks. I think regular readers know which few stocks I have been blogging about. 

Moving house is never fun and the transition I am making is also not fun because it means giving up on something that is more immediately satisfying (i.e. certain distribution income) for something that is less so (i.e. possible capital gains).

Nonetheless, this has been my plan for many months now and I am staying the course. While I do this, the dependable and regular income from S-REITs is a constant source of comfort. This income, however, cannot be relied upon indefinitely as the still benign conditions are showing signs of change.

Having said this, in the last few trading sessions, as the unit prices of S-REITs declined rapidly and in large magnitudes, short sellers had a ball of a time. Shorts will have to be covered and the decline in unit prices will come to a halt and rebounds are to be expected. 

So, it could provide trading opportunities for long only investors.

In all that we do, stay pragmatic and do not be overly optimistic or pessimistic. We want to continue loving something only if it is still worth the loving and keep in mind that money should go to where it is treated best.

With the spectre of rising interest rates as the U.S. housing market and economy recover, we should naturally be concerned about interest rates in Singapore because we know what higher interest rates will mean for REITs. 

So, even as we stay invested in S-REITs, think about how we should not throw caution to the winds.

S-REITs are no longer the low hanging fruits they once were and if we are not careful, we could end up with some pretty expensive buys and the recent price declines probably caught quite a few unwary investors. 

To expand on the analogy of low hanging fruits, we do not want to be stuck high up in a tree with no way of coming down.

Related posts:
1. Is this the start of a bear market? What to do?
2. 2012 full year passive income from S-REITs.
3. Do not love unless it is worth the loving.


seefei said...

Like your advice of not feeling overly optimistic or pessimistic in share investment. Our good stöck Sound Global is making a run in the last few trading days. I had divested after last quarterly report at about the same time you blogged about its divestment also. People who follows the cowboys in SPH are getting a rude shock in the last few trading sessions after the initial euphoria dies off.
REIT is not bad class of investment. After the low lying fruits have been plucked, the remaining trees can be amalgamated into a larger orchard. When that days come your trees may worth more than their current orchard value. This is the next phase of development in the REIT market called "irrational consolidation" phase.

Garfield75 said...

Hi ak,

Can't seems to find the post on sph, Anyway, here is my ECA review. I hope my boss don't see this, later she thinks I copy from your web page.

Clementi Mall (“CM”) is sold to SPH REIT at S$570.5 mil, below its valuation of S$598 mil as at Aug 2012
·        CM’s 2012 NPI is S$25.4 mil, this translates to a NPI yield of only 4.25% (based on the valuation of S$598mil as at Aug 2012).
·        The low 2012 NPI of S$25.4 mil cannot support the high valuation of S$598 mil (esp. on an arm’s length transaction to a REIT where SPH is a sponsor). Therefore, the valuation has to decrease and SPH needs to provide income support in order to inject CM into SPH REIT.
·        Based on a NPI of S$31 mil (income support NPI, see below), a cap rate & terminal yield of 5% and a target discount rate of 7.5% used in the DCF model, Knight Frank has arrived at a valuation of S$570 mil. Without the income support, Knight Frank has valued CM at S$557 mil.

Interesting Financial Engineering
Income Support for Clementi Mall:
·        Income Support mechanism for CM: In the event that the net property income of CM falls below S$31 mil p.a., SPH will provide an income support for up to S$20 mil in total over a period of 5 years from listing date.
·        It should be noted that based on 2012 NPI of S$25.4 mil and valuation of S$570.5 mil, this translates into a paltry NPI yield of only 4.5%. However, with the income support, the NPI yield will increase to a decent 5.43% (31 mil/570.5 mil).
·        This is clever financial engineering and the S$20 mil is “well spent”. If SPH shaved off another S$20 mil from CM valuation of S$570.5 mil instead of using the same amount for income support, this will only bring the NPI yield to 4.6%  (25.4 mil/ 550.5 mil), which will still be low. The improvement on the NPI yield is significant when the S$20 mil is used to provide the income support and bring NPI p.a. to S$31 mil (NPI yield = 5.43% ,i.e., 31 mil/570.5 mil) .
Sale of Paragon on a 99 year leasehold to SPH REIT:
·        SPH owns 100% of Paragon which sits on a freehold land.
·        For the injection into SPH REIT, they are only selling (a) 99-yr lease on the land, (b) the “Paragon” trademark and (c) the Paragon building to SPH REIT.
·        On a leasehold basis, with a cap rate of 4.75%, terminal yield of 5% and a target discount rate of 7.5% used in the DCF model, Knight Frank has arrived at a valuation of S$2,500 mil.
·        On a freehold basis, with a cap rate of 4.65%, terminal yield of 4.65% and a target discount rate of 7.5% used in the DCF model, the valuation of Paragon is S$2,610 mil.
·        According to Knight Frank’s report, the leasehold value is approx. 95.8% of the freehold value, this is similar to the conversion ratio of 96% using the Bala table.
·        This means that SPH retains the rights to the land after 99-year. This is similar to a previous deal involving Keppel Land and K-REIT, where Keppel Land sold 99-year lease on the Ocean Financial Centre (which sits on freehold land) to K-REIT.
Gearing at the REIT level would be required to bring distribution yield of SPH REIT to an attractive level.
·        The prospectus of SPH REIT is not out yet, therefore, the pricing and dividend yield is not available yet. I did a quick calculation of the distribution yield using the valuation and NPI of CM and Paragon provided in the circular and I have made some assumptions on the leverage and interest costs.
·        The blended NPI yield is 4.5% (unleveraged). However with leverage, assuming (a) an interest costs of 3%, (b) a gearing of 40% and (c) AM fees paid in units, this will bring the distribution yield for SPH REIT to 5.43%. 

AK71 said...

Hi seefei,

I try to take my own advice although it can be difficult sometimes. This is the honest truth. :)

Well, if we believe the saying that all investments are good at the right prices, then, there isn't any bad investment, only bad entry prices. ;)

There is likely to be more volatility in the days ahead before unit prices consolidate on what might be a new level which Mr. Market is comfortable with. What are the price levels going to be? When is this going to happen? I dare say that no one knows.

What we do from here will depend on individual motivations for being invested in S-REITs. There isn't any right or wrong response. Remember that peace of mind is priceless. :)

AK71 said...

Hi Garfield,

Wow! Thanks for sharing your research on the proposed SPH REIT! You should have sent this to me in an email and I would have put it up as a guest blog post. Good stuff! :)

I guess this means that I am better off looking at possibly buying more shares of SPH and giving the REIT a miss. ;)

Garfield75 said...


My personal view is tt sph has been overpaying for their real estate assets..that is why the income support, I reckon they may need to do income support if they need to inject seletar mall into the REIT .

blauereiter said...

Hello Mr Ak71, thanks again for your valuable insights.

I am vested in several of the REITs you mentioned and am naturally worried by the recent disturbance in the "force".

I'm confident the prices will pick up again because the fundamentals are sound, but I do have a question - why would say, a speech/announcement made someone in another country have so big and direct an impact on what are by and large local assets ? ( in this case the S-REITs ).

Please excuse me if this sounds like a dumb question.

AK71 said...

Hi Garfield,

You are not alone in your belief. :)

Well, I suppose having a REIT to take over these malls is the best way to correct the "mistakes".

I have linked up your analysis to the SPH blog post earlier so that more people can benefit from your ECA. ;)

AK71 said...

Hi blauereiter,

The concern here is with interest rates. :)

Singapore's interest rates are "imported". So, if the USA should start increasing interest rates, ours will increase too.

Higher interest rates are generally bad for REITs because it would mean that their finance costs will increase and everything else remaining equal, DPU will reduce.

Of course, if interest rates increase, the risk free rate will increase and to invest in riskier assets like REITs instead of leaving money in a relatively safe fixed deposit, for example, Mr. Market will demand a higher distribution yield. The only way for this to go up, everything else remaining equal, is for unit prices to fall.

Of course, the Fed have not changed anything. QE is still ongoing. However, it is said that Mr. Market is forward looking and is expecting interest rates to rise. Could Mr. Market be wrong?

Garfield75 said...

Ak, I like your way of looking at things...correcting their mistake. Investment bankers are ingenious at creating value. There is where we get our Lehman brothers crisis, human are victims of their own folly, just hope that we are not the victims along the way.

I am losing my belief that the ppty is correcting its price and int rate will go up ....the merry making is too good to give up for the govt. only thing stopping me is the down payment. ;) Bo Looi ;(

AK71 said...

Hi Garfield,

Actually, that is the reason why quite a few friends are biting the bullet and buying their second properties. They have stopped believing that property prices will soften or that interest rates will increase.

Well, if they are right, I will be happy too because it would mean that S-REITs will have many more days of sunshine! ;)

Personally, I hedged my position when I bought a small apartment early last year. It pays not to be too positive or negative about anything including our beliefs. :)

Does the "75" in Garfield75 stand for your year of birth? If so, you are 4 years my junior. Unless you are married with children, I think you must have quite a bit of savings + CPF money. Why bo lui?

Garfield75 said...


Haha, I remembered that u did not post my comment on guessing your age and name...... I am amazed at your ability to accumulate wealth, all I can say is that I made many bad investments......and don't know how to cut loss........ I am trying to get wiser by reading and following your blog closely.;)

seefei said...

Interest rate increase due to improving economy is not a bad thing per se. In a strong economy and with NO corresponding increase in bank deposit rate, REIT is still a good investment. When SIBOR increase from 0.7% to 3.5% over a few years in 2007 REIT like CMT did not only not decline but grew in strength. In a growing economy, the REIT can increase rental to offset the additional finance cost. Different loan structure will affect the REIT performance differently.

JCK said...


Thanks for reminder on constipation on a good lunch going!

Has a good run since I boarded your blog last year.
The run up in stock prices was a bonus to the divs.

As for QE being stopped, pipe dream for Bernanke.
All economic indicators are not good, especially the jobless claims. THIS is his hoodoo.

Instead of pumping into the mkts, he could have just handed the trillions DIRECTLY as social welfare to the needy!

BUT then again, Benny has to take care his pay masters in the IBs, does he not? :)

lotustpsll said...

I read your thoughts with interest. I wish to highlight to you that the managers of REITs (those I have invested)are a sensible lot and have taken steps to mitigate its financial risk. One major risk that confronts REIT is interest rate risk and from what I have found out the managers have acted proactively in hedging the risk by taking fixed rate borrowings. For e.g. Cache, Cambridge, Aimsampi - major portions of their debts are hedged. This factor, often not mentioned by analysts, is important. I agree the short sellers will have to cover its position and the time will come.

Garfield75 said...

REITS are ok if they don't over geared, the likes of CMT, FrasersCentrepoint has learnt their lesson when the GFC hit them hard...

AK71 said...

Hi Garfield,

Did I do that? I don't remember. Seems harmless enough. Hmmm.

I made many bad investments myself. I guess if we make more money than we lose, then, it is not too bad. I am definitely not wiser than you. :)

I do acknowledge that I am able to grow my wealth more rapidly because of my chosen lifestyle. I am not a good role model, therefore, if you know what I mean. ;p

REITs are probably more robust in their balance sheets this time round compared to the pre GFC days. However, the question in many people's minds now is probably not whether REITs will go kaput but how will DPU be affected.

AK71 said...

Hi seefei,

Yes, the assumption that REITs will be able to continue to increase their income by upping rents is probably required for us to stay invested without a reduction in unit prices. This is in the face of increasing interest rates.

The question which is harder to answer is, of course, for how long more can the REITs do this?

AK71 said...


Indeed, nothing has changed with QE. It has not stopped and it does not look like it will stop soon.

However, it has also been said that Mr. Market is forward looking by as much as 6 to 9 months. So, the recent plunge in unit prices of S-REITs is due to Mr. Market's expectations that interest rates will increase. Well, we can wonder if Mr. Market is right or wrong.

However, the more pragmatic thing to do is to look at our motivations for being invested and whether the circumstances warrant any change in strategy. :)

AK71 said...

Hi lotustpsll,

The quality of the management is important. :)

Hedging is an important strategy. However, when the time comes to re-finance, REITs will not be able to escape the higher cost of debt if interest rates are higher then.

So, being forward looking, Mr. Market is factoring in this possibility which is probably the reason for the recent plunge in S-REITs' unit prices.

lotustpsll said...

Hi AK 71,
I agree that management quality is also important. Hence this is one of my parameters too. I have been through thicks and thins investing in REIT (started about 2 1/2 years back) and each time REIT bounces back. Although I am staying the course but have done some switching to higher yields REIT, such as cache, cambridge, aimsampi, to compensate for the higher risk. The prospects for these 3 REITs for next 2 to 3 years look good. Please read their most recent reports.

AK71 said...

Hi lotustpsll,

I agree that the industrial REITs you have highlighted are fundamentally sound and I am vested in all three. Definitely, there is a greater margin of safety for anyone buying in now compared to just a few sessions ago. :)

INVS 2.0 said...

I don't think the increase in interest rates would hamper the dividend yield. DPUs may fall but so are prices. So the net effect might be compensated afterall. Maybe a 7% - 8% is still realistic in the future.

AK71 said...

Hi INVS 2.0,

In theory, that is how it works. If DPU were to fall, to maintain the same distribution yield, unit price will have to fall and if unit price does fall, then, those who bought at higher prices will suffer capital loss.

Garfield75 said...

Ak, any particular reason why u never/hardly mention hospitality trust in your blog.

AK71 said...

Hi Garfield,

At one time, I did look at CDL Hospitality but I decided to go with the industrial REITs which I felt was more undervalued. Anyway, turns out that CDL Hospitality would have been a very decent investment if I had gotten in back then. Hindsight. ;p

Anyway, there could be a better time get into CDL Hospitality in future. :)

lotustpsll said...

Hi AK,
I will be adding on to REITs (with yields > 7%) to take advantage of the next round of reporting. The opportunity, given current weakness, is too tempting to be ignored. In my view the talk of interest rate rise and the impact it has on REIT is way over-blown. This factor is not the end-game. Economic recovery should benefit generally all sectors and that should include REIT business. The key question is whether REIT can grow DPU stronger than the rise in interest rate - that should be the determinant. Regards

fhs said...


I'd recently bought Keppel Reit at 1.57. yes..before it went all the way down.

Read reports that it is actually over-valued after I'd bought it - is this true?

Would appreciate any guidance - should I sell this off now before it goes down further or should I just hold it? Not sure how much lower will this go...

Thanks much!

fhs said...


I'd recently bought Keppel Reit at 1.57, before it went all the way down...Read some reports which sugggest that it is over valued - is this true?

Would appreciate any guidance on what should I do with the Reit - should I sell it off now, or hold it? Not sure how much lower it will go. Any thoughts on the prospects for this Reit over the next 1-2 years?

Thanks much.

AK71 said...

Hi lotustpsll,

I certainly feel that with the lower unit prices now, there is more margin of safety. :)

If S-REITs are able to grow their income levels so that DPU is unaffected despite a rise in interest rates, they would be great investments.

I feel that S-REITs are still good investments for income. However, we want to stay pragmatic and not be overly optimistic.

AK71 said...

Hi fhs,

Well, even analysts have differing opinions.

You want to ask yourself why did you buy into Keppel REIT at the price you did? Does the investment match your motivation as an investor? If it does, at a lower price, wouldn't it be more of a bargain? Then, shouldn't you be thinking of buying more?

If the investment does not match your motivation as an investor, then, you should not be invested in the first instance. Look for an opportunity to sell.

You have to decide for yourself what to do next. ;)

fhs said...

Hi AK,

I'd bought it cos I thought commercial rents for prime office space wld increase and that Goldman Sachs bought into it. But it turned out that it was reported wrongly and that Goldman Sachs did not buy the shares. And subsequently other reports mentioned that Keppel REIT has high gearing etc. I've only recently started investing so I got quite confused with the conflicting reports and don't know how to assess... :(

AK71 said...

Hi fhs,

If you based your decisions on the research of others, then, it could explain your confusion.

Anyway, you want to ask some questions.

First, are REITs good investments for you? Understand what they are and what they can do for you. I have plenty of blog posts on REITs in the right sidebar. Take a look. :)

If REITs are what you want, then, for a start, look at the annualised DPU, the distribution yield, how sustainable is this? You think there is going to be income growth? Why? Are leases coming up for renewal? Are current leases at below market prices?

Also, the gearing level, interest cover ratio and NAV/unit need a look at.

Of course, there is much more to learn. This doesn't quite cut it. :)

Finally, please understand that difference between price and value. If you do all the things right, you won't be too affected by price fluctuations. Peace of mind is priceless.

AK71 said...

Roy Ling, managing director at RL Capital Management, said: "Singapore REITs went up almost 70 per cent in 2012. This year they're still up but last month they pulled back about 10 per cent on average. This is due mainly to a fear of rising interest rates due to US pulling back on quantitative easing.

“We've seen long-term bond yields rising but now it's a bit more uncertain over what happens to interest rates. Our view is that any pull back in interest rates would likely be more backdated rather than in the near term. So if there is any pull back in REIT prices, it will present a pretty good opportunity to buy if you're able to hold the REIT for at least 12 to 24 months."

With increasing uncertainty in the markets and more REITs anticipated to list experts say REIT managers must be able to demonstrate the growth potential of the trust.

These include highlighting plans to increase net income from the REIT assets in coming years.

CNA, 6 June 2013.

eastcoastlife said...

Last week was my first time buying REITs after reading your blog posts. But I sold them after friends warned me about the possible interest rate hike. I bought First, Sabana and Cambridge. Now, I wait and see first before buying REITs.

AK71 said...


I hope you made some pocket money selling the REITs you bought last week. :)

Well, your friends are probably right about interest rates. After all, with rates so low, the chances are higher that they will go up one day. When exactly? That is harder to answer. ;)

So, I always say we should adopt a pragmatic approach. Don't be too optimistic or pessimistic.

People who are too pessimistic would keep cash and wait for the next big crash before venturing back into stocks, REITs included. In the meantime, they see their wealth eroded by inflation.

People who are too optimistic would be almost fully invested. They could be caught in a bad way if the tide should turn against them.

eastcoastlife said...

Yes, I made some money to buy the Magnum ice-creams. haha.....

I should treat you to one for the tips. :)

You got Facebook?

AK71 said...


Yup, I do. My Facebook moniker is "Assi AK". :)

I think I provided a link in this blogpost: City Harvest Church: A personal account.

June-licious said...

Hi, sorry as this is a pretty random comment. Just want to know how did you manage to get the tools to get the retracement line as I am unable to do so in the same software you have posted.

Btw, can share some views on Singland, UOL and OUE? Noted that these are pretty deep value property counters =).

Thanks for your advice.

AK71 said...

Hi June,

I suppose you are referring to the Fibo retracement lines? Er, this is definitely available if you are using ChartNexus. I can only suggest that you try mousing over the different drawing options and you will definitely find it.

As for what I think of the three property counters you mentioned, I don't know them well enough to say anything. However, if your research shows that they are deeply undervalued, then, their stocks should be good to buy. ;)

Ray said...

Wow AIMS price is dropping like flies... any thoughts AK?

btw, i sent you a friend request on Facebook. Ray = Raymond Chiam.

AK71 said...

Hi Ray,

I am clueless on this one. Well, then again, I am clueless about price movements most of the time. ;p

I will check my Facebook account later. :)

Ray said...

thanks for adding me.. now we are officially friends... or are we? lol

never knew any friends with one dollar coin face. ;p

AK71 said...

Hi Ray,

Of course we are friends. :)

Er, it is not a $1 coin. -.-"

Ray said...

oh!? It's a gold coin!! lol. never looked at it closely before... always thought you like our SG $1 coin so much. haha, my bad.

AK71 said...

Hi Ray,

Haha... Yup. Well, it is only after you mentioned it that I thought it might look like the old $1 coin if we just glance quickly at it. ;p

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