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Why I avoided investing in EC World REIT?

Tuesday, May 2, 2023

A reader told me that, fortunately, he heeded my warning about EC World REIT and did not invest in it.

To be quite honest, I could not recall when I did that.

Doing a search of my blogs, I found out that I blogged about EC World REIT in early 2018 to explain why I had my doubts about the REIT.

When in doubt, I stay out.

I don't have to do a complete analysis to know that I want to avoid investing in something.

If I see a red flag or two, that is enough for me to stay away.

OK, I admit I am lazy.

As if you don't know.

Anyway, it could be interesting to revisit the reasons why I avoided EC World REIT and also a chat I had with a reader.

At the time, I was concerned about the relatively short land leases. 

They were similar in length to most Singapore industrial land leases. 

Of course, later on, I found out that it was a characteristic of Chinese real estate. 

So, it became less of an issue. 

At the time, I was also concerned with the relatively low distribution yield. 

The distribution yield was about 7%. 

If I remember correctly, we could get much higher distribution yields back in 2018 from comparable REITs in Singapore. 

Also, that 7% distribution yield was only possible because of sponsor support. 

Without sponsor support, distribution yield would have been less than 6%. 

That was some aggressive financial engineering at work.

Lower than 6% in distribution yield?

Definitely too low for such short land leases, I felt.

The sponsor also accounted for two thirds of the REIT's income. 

That was a huge concentration risk.

I also did not like that their debt was denominated in Singapore Dollar. 

It reminded me of Lippo Mall Trust. 

REITs should strive to borrow in the currency of the country their properties are located in to benefit from natural currency hedge.

To employ forward hedging against currency movement is expensive.

A natural currency hedge protects against disadvantageous foreign exchange movements without incurring extra cost. 

I didn't like that a seaport was part of the portfolio. 

EC World REIT was supposed to be about e-commerce assets. 

I got the feeling that the sponsor was just trying to dump assets on unsuspecting investors by including a port in the offer. 

In response to my blog, a reader had the following to say. 

"I actually view the Singapore Dollar denominated debt as being good for EC World REIT. 

"This is based on the likely appreciation of the Chinese Yuan against the Singapore Dollar. 

"Indeed, the Chinese currency has appreciated against the Singapore Dollar in recent times and, going forward, I believe this trend will continue given international pressure on China to reduce trade deficits. 

"I am quite heavily vested in EC World REIT. And thanks for sharing your views."

Regular long-time readers of my blog would know what I would have said to that. 

We can have an opinion on what might happen to the Chinese Yuan against the Singapore Dollar.

However, we must recognize that when we do that, we are speculating. 

What I have stated about natural currency hedge is a fact. 

The fact is that having debt in Chinese Yuan for Chinese real estate provides a natural currency hedge. 

I hope that reminding myself about why I avoided investing in EC World REIT has been a useful exercise for you too.

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Tgie said...

This is similar to S Chip. Run for your life.

AK71 said...

Hi Tgie,

I so stunned like vegetable! O_o

How like that? ;p

zhenling said...

would you avoid keppel pacific oak CMOU.SI as well?
it owns freehold property, but debt denominated in SGD also. Thinking with the downturn in US commercial property, good opportunity might present itself, but I don't know if the ~40% gearing is low enough, all things considered.

thanks in advance if you decide to talk to yourself about this!

WK888 said...

So Capland China T is also q no no? Debts also in SGD with hedging policy in place... haiya!

AK71 said...

Hi zhenling,

Yes, I would avoid Keppel Pacific Oak too.

To be fair, I am painting with a broad brush here.

I do not know enough to make any meaningful or important difference between the US commercial S-REITs available.

So, I will listen to Charlie Munger. ;p

AK71 said...

Hi WK888,

With Capitaland China Trust, the Capitaland brand saves it.

I am willing to put some money in their hands because, despite the challenges, they have shown that they are capable and honest managers.

However, it doesn't mean that the challenges go away with capable managers running the REIT.

So, I would be careful not to make it the largest investment in my portfolio. ;p

The biggest red flag to me in a REIT is aggressive financial engineering to make it look more attractive and this was really a thing many years ago when REIT IPOs were the rage in Singapore.

No one cares more about our money than we do.

WK888 said...

With the reopening, I think it's worth a bet... 😂

AK71 said...

Hi WK888,

As long as people know that they are speculating and are using money they can afford to lose, I don't see anything wrong with betting. ;p

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