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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.
Bloggy Award
14 comments:
After reading your blog, I started investing in my first REIT. Fortunately I didn't buy at a high price. I am waiting to buy another two more for the dividend yields. I had bought shares (with no dividend yield) blindly in the past and didn't know that I could have a passive income. Grateful to you for your selfless sharing. Hope I have a chance to treat you to tea one day. :)
Hi ECL,
I am only sharing my thoughts. Nothing too profound. If my blogs have proven useful to readers, I am happy. :)
Thanks for your offer of a treat to tea. Perhaps, you would like to make a donation to my favourite charity in the meantime? ;p
See: Counting our blessings.
Thank you. :)
Too many people view "investing" in REITS as a potential capital gains situation, which is why people focus so much on the PRICE, rather than the YIELD. If you wanted a decent and sustainable yield, that should be your focus on not whether your REIT had decline 15% within say 3 weeks.
To give you an example, I've held Suntec REIT for nearly 9 years since IPO in 2004 December. I bought a little more at $1.11 and now the share price is at about $1.60. If you compute the annualized capital gains, that is just +4.4% a year. But if you factor in the yield, it would be about 10% per annum. So the yield is obviously more important than the capital gains when it comes to REITs.
If people want to gun for capital gains, then perhaps REITs are not the correct instrument for them.
Hi MW,
Thanks for this very incisive comment. :)
Indeed, I always say that we have to understand what we are investing in. Then, if we invest in it with a good margin of safety, we just have to sit back and let Mr. Market do the rest.
When we invest in REITs, we are investing primarily for income. Any capital gain is a bonus.
Readers might be interested in an older blog post of mine written in 2010: Building and preserving our wealth.
For most of us, having a well paying job and having good money management habits are the bedrock to building our wealth. Whether we choose to invest in Blue Chips or REITs later on could then build and preserve our wealth at the same time. Indeed, why not invest in both?
No option 3... buy more at depressed level...?
Hi Gark,
LOL. :D
I was wondering whether to put in that option but I decided that this blog post is really for people who are wondering what to do with the units they already have in hand.
However, if we read this blog post again, we might have a feeling that we want to buy more when valuations are more compelling. ;p
Hi AK,
I treat REITS as an instrument as dividends rather than going for capital appreciation! Always ask whthr the business, type of industry can stay relevant for the next 10 years! =)
Best Regards,
Gary
Hi Gary,
Indeed so.
We should know what we want and find the correct tools to achieve our goals. :)
David Lum of Daiwa, in a report dated July 3, upgraded the sector to “positive” from “neutral”, noting that value has emerged. The sector’s weighted average price-to-book ratio had come off from 1.25 times at end-April to 1.05 times at end-June, he said.
“Although we cannot rule out further unit-price downside risks for S-REITs (triggered by rises in the 10-year SGS yield), we can now declare with some confidence that we believe the overall S-REITs sector is no longer overvalued,” he said.
Source:
http://www.theedgesingapore.com/blog-heads/frankie-ho/44581-weekend-comment-jul-5-reits-offer-value-after-selloff-says-daiwa.html
UOB KayHian downgraded the sector to “market-weight” from “overweight”, mainly on the view that borrowing costs will rise. An increase of 100 basis points in interest rates will reduce the price targets of the REITs under its coverage by about 8.1%, it said.
Even so, as economies recover, REITs will evolve from being “yield vehicles” to “growth vehicles”, UOB said. This should help mitigate the impact of higher interest rates on their income.
UOB’s preference is office and industrial REITs, which it expects will benefit from a pickup in rentals.
Source:
http://www.theedgesingapore.com/blog-heads/frankie-ho/44581-weekend-comment-jul-5-reits-offer-value-after-selloff-says-daiwa.html?start=1
AK,
I like your statement:
"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."
(Capitalisation are mine)
It can only come from someone that has gone through personal hindsight epiphany ;)
Experience is something we can't buy or acquire vicariously.
Anyone with no battle scars in investing is suspect!
Hi SMOL,
Ouch!
Maybe, I should go see a dermatologist about possible scar treatments. ;p
Hi AK,
I've invested in Sabana some times back. Now I still have confident in REITs and looking for a good counter. Any to recommend?
Thanks
Vanson
Hi Vanson,
Nah, I never recommend any stocks here in my blog. Sometimes, I talk to myself and if you happen to hear me talking, I apologise. I can be quite loud. :(
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