Never lose money in real estate and REITs?

I have cautioned people that we are likely to see a decline in prices of residential properties in the next few years. Unless we are sure that we are looking at an undervalued property, we should think again about passing that cheque to the agent. After all, it is a big financial commitment.

The government continues to make more land available for new residential developments. Already, there is a rising vacancy rate in non-landed private residential properties. This would likely worsen as more developments are completed in the next two years. We could have the perfect cocktail for a deep correction in the market if interest rates should head north come 2015.

We retain our negative view on the Singapore residential sector as we continue to see a rising threat of vacancy with an acceleration in physical completions in 2013-15.

Vacancy rates for non-landed private units had increased from 5.9% to 6.1% qoq in 3Q12 as take-up continued to lag physical completions. URA estimates that completions will rise from 16.1k units in 2013 to 23.1k units in 2015, 2-3x more than the historical average occupancy rate of 8k units per year.

We forecast that physical residential prices will fall by 5% by end-FY13, with vacancy rates for private units up from 6.1% currently to 7.2%. (CIMB, 11 Dec 12)

With industrial properties, the government has also made more land available in order to keep the cost of doing business down in Singapore. With investors channelling their funds into commercial and industrial properties due to cooling measures imposed on residential properties, prices of commercial and industrial spaces have sky rocketed.

In all areas, how much of the demand is, therefore, user demand? How much of the demand is from property investors and speculators? The end result is the same. Prices are pushed up which leads to more building. We don't need a degree in Economics to know that oversupply will bring down prices. People who bought at high prices should have deep pockets to avoid foreclosure.

So, how will my investments in industrial S-REITs be affected? They will not escape unscathed, for sure. This is where the quality of the management will be called into question. Quality of management?

For example, Saizen REIT has been able to maintain occupancy of 90% or so for their properties in Japan despite the difficult conditions and much lower occupancy levels of competing properties. I believe in their management's quality.

So, if the management is up to scratch, we could see above average occupancy levels even as more supply comes on stream. However, in a situation where there are many alternative offerings, to retain tenants, rental rates would probably come under pressure.

Although we could continue to see some yield compression in 2013 as money seeks out higher returns in industrial S-REITs, I would be surprised to see unit prices rising by more than 10 or 15% next year. If people ask me if this is still a good time to invest in industrial S-REITs, I would say it is still good if we are investing for income but, perhaps, not so good if we are looking for capital appreciation.

My two largest investments in industrial S-REITs are:
1. AIMS AMP Capital Industrial REIT
2. Sabana REIT

Of the two, I am more impressed with the former's management quality. AIMS AMP Capital Industrial REIT's management have renewed many tenancies ahead of time while Sabana REIT which has almost 48% of its tenancies expiring next year is slow to show results.

So, do we press the panic button? I think not. Sabana REIT would probably be able to renew most, if not all, of its expiring tenancies as the full impact of the new supply coming on stream would not be felt in the very short term. Nonetheless, the impression I get of a management that seem to be dragging their feet nags at me.

I have stayed positive on S-REITs for quite a while now. It is now prudent to turn more cautious on S-REITs although it is too early to turn negative.

Supported by lower than average completion of new industrial space over the past few years, vacancy levels for all industrial segments (Business Parks, Multi-User Factories and Warehouses) have hit record lows. This had led to a strong surge in industrial capital values and rents by 6-26% since the start of 2012. Looking ahead, we see market dynamics turning given that close to 49.7msqft of industrial space currently under construction will be completed over 2013-2015. This, on an annualised basis, represents more than twice the annual supply over the past decade.
(DBS Group Research, 6 Dec 12)

Related posts:
1. AIMS AMP Capital Industrial REIT: 2Q 2013.
2. Sabana REIT: 3Q 2012 DPU 2.34c.
3. Staying positive on S-REITs.
4. AK71's simple strategy.
5. REITs: When to buy?

A letter from a 66-year-old retiree.

I have received many emails in my three years as a blogger. Of course, there were some unpleasant ones but, fortunately, most of them are not. Many are questions which I would try to answer to the best of my knowledge. As I am not a trained financial adviser, however, I am not allowed to give advisories and I have refrained from doing so.

 

 

Sometimes, I would share readers' emails here in my blog, especially those which I think are inspirational or those which I think readers might find beneficial in some way. Today, I received a bracing email from a 66-year-old retiree. 

 

Blogging is a very time and energy consuming activity but if I have been able to make a positive difference in the lives of people through my blogs, then, it is definitely worthwhile.

 

hi AK,

i am a 66 yr old retiree who came upon your blogpost ASSI about a year ago quite by chance.

i had dabbled in shares many many years ago and having been burnt i swore i wont touch the SGX ever again.

However, after selling off my apartment and cutting off the rental income last year i was in a bind

as there was no more income and saddled with cash earning practically nothing and being retired....

until i came upon your blogs on the REITS and especially AIMS and SABANA. i have vested in both since end of last year and have been comfortable with the passive income without the hassle of tenants , repairs , maintenance fees and taxes.

i do not think you fully realize how your intelligent, knowledgeable, and objective views have helped

people like me who previously only depended on tips and rumours with disastrous results.

not only have i benefited from your analysis but i have also learned alot from your gems

like 'i have begun not to be bothered with price movements and be more focused on passive income (something to that effect)'

most of all you come across to me as very sincere in wanting to help those who want it.

therefore i urge you to ignore those who are critical of you and yet devoid of any alternative views. (like those comments of your recent yahoo finance reprints)

.....

yours gratefully,

.......

Related posts:

1. A letter from a reader in his early 20s.

2. Article published in Yahoo! Finance Singapore (2).
3. To be richer, be comfortable with being invested.

Unrelated post:
See photos of my staycation in MBS: here.