Why I avoided investing in EC World REIT?

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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Reader says...
What do you think of EC World REIT?

AK says...
EC World REIT, I looked at it and was in the process of blogging about it but, somehow, it joined the ranks of half finished blogs. I have about 400 of these. Terrible, I know.

Looking at that half finished blog, I remember I was concerned about the relatively short land leases, similar to most Singapore industrial land leases and the relatively low distribution yield.





The yield was 7% or so and this was because it was bolstered by the sponsor as well. Without the sponsor's support, the yield would have been much lower. Less than 6%.

Still, the sponsor accounted for two thirds of the REIT's income. Real concentration risk.

There was also something about having debt denominated in S$ which I didn't like. I would have liked for all the debt to be in RMB which would give them a natural currency hedge.





Also, I didn't like that a port was such a substantial part of the the REIT's portfolio. Quite the opposite of e-commerce.

It just didn't seem rewarding enough for the risks we must bear.

I would demand a much higher yield for something like this.






Just being promising is not good enough. Whether I am being compensated sufficiently is more important and this brings to mind my PCRT story.

This is just me talking to myself, of course. 😉

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