Investing in REITs – The Ho Sim Lang Way
Some of my friends have been asking me how to invest in REITs, and as much as I know next to nothing about investments in REITs, I also realised that what was hindering me was my lack of knowledge about them. Essentially I was stuck at the “I don’t know what I don’t know” stage. The challenge was really to move from that to the “I don’t know” stage. And everyone knows that if you say you don’t know something, you can actually go read up about it and find out. So that was what I did, and oh, how it unravelled from there.
I decided to ask around, read newspapers, read online blogs, read the astrological signs in the darkened night sky (it helps you know) and guess what I found out? It is interesting to say the least.
So since I know, I thought, why not share. Ho Sim Lang mah. But I say first ah, this is not advice on what to buy hor. You read and make your own decisions. If make money, donate to charity, if lose money, blame yourself for not reading up more.
I would first read up on the following indicators before embarking on anything to invest in.
1. Area of business – The REIT could be managing shopping malls, service apartments, or industrial estates, etc. You should also notice that some give higher yield while others give lower returns. You must first understand why. Those in areas where demand is inelastic, like in your heartland malls or healthcare tend to pay lesser. Recession or not, people still need to eat and shop. If you need to rest in hospital, you will lie there whether you like it or not.
In a factory or industrial plot scenario, they are usually the first to be hit by recession. When that happens, they either tahan or they call it a day. Industrial assets are also on very short lease. That is the reason why Mall Reits are typically giving out lower yields while Industrial Reits are giving a higher yield. You must also know when this will change and be aware of the changing conditions. Keep your eyes peeled opened.
2. NAV against the share price. NAV means Net Asset Value (not Norton Antivirus). Avoid paying way above NAV. People who pay above NAV tend to say there is potential for the NAV to appreciate in value. You must be aware that Singapore REITs have to pay out at least 90% of their income. There is hardly any capital left for growth. So if that is the case, is there any reason to buy REITs for appreciation in value? If anything, price increases in REITs could be due to speculation. True bo?
Or any appreciation in the NAV might be due to inflation, which is more likely the case. People buy REITs for passive income, so you would really want to buy at a price lower than its NAV. Pay way below book value if possible, as the assets will go at a huge discount when a REIT has to do the unfortunate thing of liquidating its assets. Think property fire-sales and you would understand what I mean, everything is often let go at a discount.
3. Gearing – and I am not talking about mechanical gears. Gearing refers to the percentage of borrowing. The REIT manager will want to keep expanding the REIT so that he gets more commissions and a higher pay. I would do the same if I was a REIT manager. He is paid more managing a $100 million dollar REIT than a $10 million REIT. He will naturally want to expand the REIT through borrowing more money in order to buy more buildings and assets.
Guess who bears the risk of his actions? You.
It’s risky when a REIT manager is in Godzilla-mode because when there is a credit crunch, eg. like the last financial crisis, banks will usually refuse to refinance the assets as the prices of these assets would plunge, sometimes below sea level. Many REITs got themselves into trouble and needed to dispose of their assets at dirt cheap prices. The REIT holders will see the market price of their share holding drop like a stone from a multi-storey carpark. But guess what, the REIT manager still gets his pay. So REIT manager on Godzilla-mode is bad. That said, on average, a gearing of 30%-40% is about the limit. I personally like anything that has less than 35%. If possible, less than 30% gearing.
4. DPU – This is the juicy part. This is what will set you free to fly like a bird. When you invest, you would want to get a decent return. Compare it to Bonds, FD, PPS (google it!), you would want a higher return when you invest in REITs, otherwise better to invest in those other instruments. Next, you would also want to assess if there is a potential for the yield to increase or drop. What is the percentage of payment and what percent of the total revenue and profit make up the DPU. Part of the income must be kept for maintenance or else your DPU will drop in years to come. It is the yield that you need to watch. DPU refer to Dividend Per Unit by the way.
5. The REIT Manager – Hopefully they are honest and skillful. Is the manager only interested in self-interest or overall interest? Are they skillful enough to extract the most out of the property. Simply compare with others in the same sector and you can tell, i.e. rental, vacancy and the yield. Some REIT Managers are all out to acquire more properties (think: Godzilla-mode) and increase their professional fees for managing more properties. But the yield on some seemingly good REITs are surprisingly lower than others in the same class. The property manager is very important in your consideration for a good investment.
6. Financial Ratios – Once you are familiar with the above 5 indicators, then it is time to start to compare their financial ratios of the different REITs and you will start to know more. Financial Ratios don’t lie, and will offer more insights into the investments, in fact for any investments that you may be thinking of putting your money in.
So you’re ready, where do you go from here?
Go open a Securities account at CDP (which is now located at Metropolis, Bouna Vista), then you link a bank account to your CDP account and all dividends will be credited automatically to your account. You will not miss any payout. If you did not link an account, you will get your dividend payout via cheque.
To learn more about REITs, just go to the REIT’s website and read about the REITs. Pretty much a no-brainer. For example, if you want to know more about ABC Kiam Chye Char Loti REIT, just simply go to their website and read all about them. They are public listed, therefore all information must be made public. The other website to visit is SGX website. All their announcements must be published on the SGX website. There are no misinformation or lies in these official sites. It is pure reports and facts. Sometimes those unofficial blogs or REITs focus blogs tend to offer their personal opinions about the performance of the REITs, etc. That at the end of the day is someone’s opinion and in a way could be speculative. True?
So if you ask me where to go to sieve out and scour information on REITs, I would say the best thing to do is to read up on what they do and read the official news. Blogs are best to offer some advice, but these are not very accurate. Forums are probably the worst because the comments and opinions there are really unsubstantiated rumours sometimes. I typically won’t encourage reading up any blogs or discussion sites as these are full of misinformation. Read them for a feel of what is going on. But rely on them at your own risk. It is a free for all kind of environment. Serious investors go to paid-forums.
Happy learning and investing peeps.
