Demand more from REITs as investors.

The catalyst for this blog is a comment from a viewer of my YouTube channel.

The viewer said:

"... older video says you did not lose playing reit. need your help man. it is starting to feel a bit strange already."

In reply to that, I said:

"I made a lot of money investing in REITs but that was during the 15 years when interest rates were almost zero. Things different already."

We must realize that things have changed.

I blogged about how I made more than $2 million investing for income and that was from passive income received alone.

$2 million in passive income.

Sunday, January 8, 2023

https://singaporeanstocksinvestor.blogspot.com/2023/01/2-million-in-passive-income-if-ak-can.html

It did not include any capital gains made over the years.

I can safely say that more than half of that $2 million in passive income was from REITs.

If we take into account capital gains from voluntary and involuntary sale of REITs in those 15 years, I have made a lot more money from investing in REITs.

For an average Singaporean like me, that is a lot of money.

It has definitely helped me to achieve F.I.R.E. more comfortably.

However, like I said, things are different already.

In many blogs I published and videos I produced in the last year or so, I said as much.

Rapid and significant increases in interest rates have thrown a spanner in the works for REITs.

Indeed, they have had the same effect on all risk assets and not just REITs.

In an environment where risk free rate is 5% or more, Mr. Market is right to demand more from REITs.

This means yield has to expand, all else being equal.

I made videos on this and I am including them here for people who do not follow me on YouTube:

If a REIT was yielding 5% when risk free rate was almost zero, now, it should yield 10% or so in order to be attractive.

In Singapore, if we take the recent Singapore Savings Bond which offered 3.33% p.a. 10 year average yield, a REIT which offered 5% distribution yield in the past should offer 8.33% today to be attractive, all else being equal.

This is just something to bear in mind and might not be an ironclad rule to follow, for people who still believe in REITs as viable investments for income.

However, it is simply sensible to use this yardstick, I believe.

Anyway, I get the feeling that people are still not as demanding as they should logically be when investing in REITs today.

Many are investing with the idea that interest rates might be rapidly cut from 2H 2024.

Investors who only started investing during the years of very low interest rates might even think that interest rate cuts means a return to the post Global Financial Crisis low interest rate environment which lasted 15 years or so.

Investing in REITs today with such a belief could lead to disappointment.

Bearing this in mind, I also made a couple of videos on IREIT Global before:

Finally, AK is losing money investing in a REIT.

This might make some people cackle with glee.

To me, this is just another example that I am not always right.

It is only paper loss right now but who knows how things would pan out?

Of course, we must not forget that AK is also losing money in another REIT, CapitaLand China Trust.

Things are different now and this is why I have been saying that I am not adding to my investments in REITs in the current environment.

Why do DBS, OCBC and UOB together form more than 40% of my portfolio today?

If AK can talk to himself, so can you. 

AA REIT, T-bill, SSBs, CPF, UOB, OCBC.

I have been thinking of taking another long break from social media to focus on other things in life.

Tentatively, I am thinking of coming back in June.

So, this might be my last blog until then.

1. AIMS APAC REIT

This is probably my most rewarding investment for income.

I have been holding to the relatively large investments made during the Global Financial Crisis till today, enjoying a distribution yield in excess of 10% on my cost.

The price appreciation is nothing to shout about but as an investment for income, it has been very good to me.

I would liken it to a bond that has been paying me a very good coupon.

As at 31 March 2024, the REIT has a gearing level of 32.6% which is on the low side.

However, I am mindful of the fact that it has some perpetual bonds which are due for a relook next year and those would likely increase in financing cost.

This is because interest rates and yields are significantly higher now than a few years ago.

This is a good reason to stay cautious if we are thinking of plonking more money in the REIT.

Offering a 7.4% distribution yield, it isn't much higher than what our local banks offer in dividend yields.

The REIT also has to distribute all its income in order to achieve this.

I simply will continue to hold on to my investment since it is already free of cost.

I am partial to receiving "free" money.

2. T-bill

The latest 6 months T-bill auction had a cut-off yield of 3.7% p.a. which wasn't too bad.

I made a video about why CPF OA money should go into T-bills, especially those with auctions in the first half of the month.

Someone told me it was all my fault that non-competitive bids were only 80% filled this time.

OMG!

Bad AK! Bad AK!

Well, like I mentioned recently, my plan is to simply grow my exposure to T-bills unless there is another stock market crash.

This is something I have given some thought to.

I really don't have to do too much on the investment front which is what I plan to do when I turn 55.

So, this is a taste of what's to come, maybe.

I would probably be sending dividends coming in from DBS, OCBC and UOB in Q2 and Q3 into T-bills.

3. Singapore Savings Bond and CPF

This month's SSB is tempting with a 3.33% p.a. 10 year average yield.

In a blog post many months ago, I said it would make more sense for me to buy SSBs with 10 year average yield in excess of 3% p.a. than to do voluntary contributions to my CPF account.

I have already front loaded this and bought enough SSBs to replace voluntary contributions till this year.

With the bombshell dropped by Lawrence Wong on how the CPF SA will vanish once we turn 55 years old, I took a hard look at my CPF savings.

In a recent blog post, I said I would have some $800K in my CPF OA by then and I think that should be enough for me.

I could use it to buy more T-bills if yields stay high or I could simply leave the money in the CPF OA.

Use the interest generated as spending money.

By extension, I don't think I need more SSBs now.

Well, I could change my mind if the 10 year average yield goes to 4% p.a. ;p

Right now, I would rather have a stronger T-bill ladder which means a bigger war chest while waiting for the next stock market crash.

Although it is true that we can redeem SSBs, we wouldn't be able to get the higher 10 year average yield in such a case.

So, T-bills are more attractive for my purpose.

4. UOB

In my video on DBS, I said that it was clear that DBS would continue to do reasonably well even if interest rate were to decline.

DBS does not depend solely on net interest income but has other sources of income.

The same is true of UOB.

Net interest income dipped 2%, year on year.

However, fee income increased 5%.

Other non-interest income increased 3% due to record trading and investment income.

Non performing loan ratio is at 1.5% which means asset quality remains stable.

CET-1 ratio is at 13.9% which is the lowest amongst the 3 banks.

So, little chance of a special dividend from UOB. ;p

By next year, UOB will complete the integration with Citibank's Vietnam consumer banking business.

Of course, the integration with Malaysia and Indonesia was completed last year.

The integration with Thailand completed recently.

Trading at about 9x PE and 1.2x NAV, UOB is offering a dividend yield of some 5.5%, paying out 50% of its earnings to achieve this.

It doesn't look as attractive as DBS but it is attractive enough when I remind myself that DBS pays out a higher percentage of its earnings as dividends.

5. OCBC

OCBC is my largest investment in the banking sector.

Alone, it is larger than my investments in DBS and UOB combined.

I really like OCBC because I think it offers the best value for money.

Well, more accurately, it did.

With its stock price having risen quite a bit, it now trades at about 9x PE, 1.2x NAV while offering a dividend yield of some 6%.

It isn't as cheap as it was, for sure.

Paying out about 50% of its earnings as dividends, it offers a dividend yield of 6%.

So, like DBS and UOB, OCBC grows in value as an investment over time.

Like I said several times recently, there is no need to worry about OCBC's exposure to the Chinese property sector.

Non performing loan ratio is at 1.0% which is even lower than UOB's 1.5%.

Like DBS and UOB, OCBC has demonstrated its ability to generate higher non-interest income.

Net fee income increased 4% while net trading income increased 67% to a new high.

With a very high CET-1 ratio of 15.9%, I am still crossing fingers that we might see a special dividend in future.

As OCBC is the largest investment in my portfolio, it would be something to celebrate if it should happen.

This is a pretty long blog post which I hope it enough to satisfy anyone who is eavesdropping until my proposed return in June.

Until then, if AK can do it, so can you!

AK is on YouTube too:
AK71SG