In the last few years, I have stayed positive on S-REITs and reaped the benefits. In a blog post just a few months ago, I said that I was no longer as positive about S-REITs but I had not turned negative on them either.
Instead, I was quite simply cautious about S-REITs as investments for income. See: Never lose money in real estate or REITs?
To recapt, at that time, AIMS AMP Capital Industrial REIT was trading at $1.46 a unit and Sabana REIT was trading at $1.12 a unit. Fundamentally, if nothing has changed in the businesses of these REITs from then to now, if I was cautious then, I would still be cautious now.
This is why I have not added to my long positions even as prices retreated from the highs of $1.88 for AIMS AMP Capital Industrial REIT and $1.385 for Sabana REIT.
I am still invested in the REITs because I would be hard pressed to find alternative investments that would give me the returns that they do. This reflects my thinking that in the shorter run, these REITs are still good investments for income.
However, there is no doubt in my mind that, just as the REITs enjoyed the good fortune of the real estate sector in recent years, they will also suffer the downturn that is sure to come. So, to add to my already sizeable investments in these REITs is not a good idea.
I revealed in my year end report for 2012 that I had started moving resources away from REITs into what I felt are undervalued stocks. I think regular readers know which few stocks I have been blogging about.
Moving house is never fun and the transition I am making is also not fun because it means giving up on something that is more immediately satisfying (i.e. certain distribution income) for something that is less so (i.e. possible capital gains).
Nonetheless, this has been my plan for many months now and I am staying the course. While I do this, the dependable and regular income from S-REITs is a constant source of comfort. This income, however, cannot be relied upon indefinitely as the still benign conditions are showing signs of change.
Having said this, in the last few trading sessions, as the unit prices of S-REITs declined rapidly and in large magnitudes, short sellers had a ball of a time. Shorts will have to be covered and the decline in unit prices will come to a halt and rebounds are to be expected.
So, it could provide trading opportunities for long only investors.
In all that we do, stay pragmatic and do not be overly optimistic or pessimistic. We want to continue loving something only if it is still worth the loving and keep in mind that money should go to where it is treated best.
With the spectre of rising interest rates as the U.S. housing market and economy recover, we should naturally be concerned about interest rates in Singapore because we know what higher interest rates will mean for REITs.
So, even as we stay invested in S-REITs, think about how we should not throw caution to the winds.
S-REITs are no longer the low hanging fruits they once were and if we are not careful, we could end up with some pretty expensive buys and the recent price declines probably caught quite a few unwary investors.
To expand on the analogy of low hanging fruits, we do not want to be stuck high up in a tree with no way of coming down.
Related posts:
1. Is this the start of a bear market? What to do?
2. 2012 full year passive income from S-REITs.
3. Do not love unless it is worth the loving.