REITs: For those who have paid higher prices.

Investing in REITs is as close to investing in real estate as is possible for small retail investors. We might not own whole buildings or entire units in a building, nonetheless, we have to employ a real estate investor's mentality when investing in REITs.

Like any other investments, could we see values plummeting to zero in real estate? Some people would say no. However, I would say, theoretically, yes. 

When would that happen? Simply, when there is no demand for real estate. Now, realistically, will that happen in Singapore?

If the answer is "no", then, there will always be value in real estate here.

Some friends and readers are worried because the unit prices of S-REITs have retreated some 20% from their highs. 

Well, for anyone who bought at the highs, there must be some feeling of anxiety especially if they invested more money than they should have. However, panicking and selling when prices plunge to a low isn't going to help make things better, or is it?

A fellow blogger said that, on hindsight, we should have sold at the highs and bought back at the lows. Hindsight is a wonderful thing. It is always right, isn't it? 

Some might say that hindsight is practically useless. I would say that it is how we look at it.

We always say that we should learn from experience. Now, isn't experience in the past and isn't looking at experience hindsight? 

So, hindsight is not useless if we learn from it.

I will say that the current distribution yields of S-REITs are still more attractive than any income investments I can think of that has a similar level of risk. 

Of course, the biggest risk in any investor's mind is the risk of capital loss and with rising interest rates in future, everything else remaining equal, S-REITs' unit prices could come under pressure.

It is difficult, if at all possible, to find an investor in this world who has not lost any money in investing. 

If we have not used any money that we cannot afford to lose in our investments, then, we can be more philosophical about the losses. 

However, if we cannot be or do not want to be philosophical, we have to think of our options.

Option 1
We could cut our losses. This would mean believing that either the income producing investment is no longer able to produce the income that it has been producing. (It could also mean believing that the market price of the investment is going to decline even more significantly in future.)

Option 2
Stay invested. This would mean believing that the income producing investment is still able to produce the income that it has been producing or even more. (It could also mean believing that the market price of the investment has stabilised or could even appreciate.)

For people who have not overpaid for their investments, of course, option 1 would be more a question of protecting any capital gains. For pure income investors, this entire blog post could possibly be just an academic exercise.

I thought long and hard on how to write this blog post in as neutral a tone as possible but at the same time making sure it is not a useless fence sitter. I can only hope that I have succeeded.

Related posts:
1. S-REITs: Are we asking the right questions?
2. Be cautious while climbing the S-REIT tree.
3. Never lose money in real estate and REITs?
4. 2012 full year passive income from S-REITs.