Thursday, June 13, 2013


STI has officially gave back all the gain it has for this year with the past 2 weeks of selling down and one of the sector that get badly hit is the S-Reits.  The reason for the selling is none other than concern of US Fed starts to taper the QE3, by doing so it is like having interest rate hike though not physically and also anticipation of the physical interest rate hike might follow next.  Well to be rationale and logical if the economic condition allows for such a move, it means that the economy can stand on its own and no need for "life support", that should be a good sign.

S-Reits sector taking the big hit mainly because the prices have gone up too much and valuation becomes over-stretched.  2 months ago, almost every S-Reits were hitting all time high and surprisingly then not a single analysts came out to sound the warning bell and it was at that time I started to pare off some stake in my long-term S-Reits holding (Journey To Retirement Part 2.1 -- First REIT) and have also sounded the warning asking long-term investors to consider selling off in a strategic move (Long term investor, time to trim fat on portfolio ???).  Those articles were posted in March.

Now let look at whether the selling down of the S-Reits are justified.  According to analysts, should an interest rate hike, S-Reits with now having average over 30% of leverage will have problem refinancing their current debts and also their assets will get re-rated due to readjustment of the interest rate.  In a way, that claims are true.  Without much cash in hold or having to pay higher interest rate to borrow to acquire more assets, the growth story of the S-Reits will be flat and hence whatever distribution will be difficult to grow further and indirectly affecting the further capital gain of the stock.  Re-rating of the assets value could mean the NAV will be lowered and hence at a higher stock price it will be trading at a higher premier to its NAV.  However, if you look at the overall and the bigger picture, S-Reits still remain attractive especially to Singapore investors (retail investors to be exact) given that their prices are relatively lower now (still higher than the November 2011 low though).  Now let look at the reason why it is so still attractive.

Firstly, can you remember when was the last time Singapore banks were giving at least 3% interest rate on normal saving account (just plain normal saving account and not FD that we are talking about).  From my memory that was like more  than 2 decades ago when we still having banks like Tat Lee and OUB.  Next, do you think that even if US Fed hike interest rate, Singapore banks can give saving bank account holder at least 3% interest rate ?  Well there is a possibility it can happen but what is the possibility and if that happens what will happen to Singapore economy and those SME can they survive in those high interest rate environment.  There are a lot of talking that US Fed hike rate and all those effects will be there but let face it, Singapore is not US, not Australia, not Europe, not New Zealand, etc.  Those countries have record of high saving interest rate in the 2007 days but not Singapore.  As such even putting money in Singapore banks will still corrode the value of the money. Cost of living in Singapore still high despite recent core inflation came down to below 2%, this is mainly because the hike in wages have not been keeping pace with standard of living and such still need investing in high-yield stocks,

The current drop in S-Reits prices have brought the average yield of the S-Reits sector back above the 5% level and probably moving towards the 6% level.  Based on pure numerical value, a 6% yield is attractive in Singapore environment.  The other side of the story which I classified as fundamental of the S-Reits is still strong and resilient.  Lot of people when talked about fundamental will only look at the company balance sheet, P/L statement, ratios and cash flow but it is more than that.  It is very easy to feel the fundamental of S-Reits as compared with rest of the companies.  Take the example of CapitaMall Trust, the biggest retail players in Singapore with all those shopping malls like Raflfes City, Bugis, Plaza Singapura, Ion Orchard, J-Cube, etc.  To know how their business is doing, simply visit those shopping malls owned by them, see the number of people flow, see the number of shops, see what those ships are selling, see whether they are having businesses and we are roughly judge how CapitaMall Trust is doing and it is a "live" tracking of how they are doing (looking at earning report is looking at what happened for the past 3 months).  Having own eyes to see is nevertheless more trustworthy to plain listening to analysts about the company.

Now here is the second catch if you decide to invest in S-Reits, taking the opportunity of the selling down.  If you are already vested during the 2009, 2010 period, you should be fully vested now and don't see any need to add further given that those prices then were much lower than now.  Just hold on to it and have cash ready in case recession comes, you just double up.  For those who have no S-Reits holding and thinking of it is still make sense to invest in S-Reits even if Singapore interest rate going up, you have to do it strategically.  Prices are cheap but not as cheap as in 2011 level and definitely not as dirt cheap as in 2009 - 2010 level.  As such, whatever you want to invest in will come with conditions.  The conditions are :-

1. The yield must be good (different sector will have different yield, retail in general 5.3%, industrial in general 6.3%, commercial in general 5.7%, etc)

2. Have to factor it the yield getting now if recession comes, you can expect to minus off another 1% to 1.5% to it as then companies earning will also be affected and the amount distributed to unit holders will be lesser.

3. Maximum amount of capital that can invest in it must cap at 50%, save the rest of the 50% and wait for recession to come when prices are dirt cheap and you double .

4. Can only invest in S-Reits with strong sponsors like those from Capitaland group, Ascendas group, Mapletree group, F&N group, etc as normally they will have lesser problem in cash flow.

The above are the conditions and rules that must strictly follow to protect any downside.  Remember when recession comes, the stock price can halve to what it is now.

Market in general is irrational so does most of the investors, one need to be know the rationale behind the irrationale in order to beat the market and get the rewards.

For quick reference of all the dividend yield of S-Reit, can refer to the following blog, SGX REIT Data


  1. Sadly, good economy almost has no effects on REITs' ability to borrow or lowering interest rate on borrowing. So whether the future is better or worse, REITs are doomed just because interest rate and its expectation is higher.

    Singapore interest rate has been low for a decade; but 6 - 7 years ago(2006 - 2007), the borrowing interest rate was still around 5%. So lower interest rate on saving account does not lead to lower borrowing interest rate. REITs are going to pay a higher interest rate even if saving interest rate is low, even higher an interest rate if saving interest rate is high.

    Is there any good news for REITs? I ain't see one.

    1. rule #1 should not be pessimistic when comes to investing, if so, you already lost half the battle.

      S-Reits is a special class of investment product and if you are just looking for quick profit then S-Reits is not suitable for you.

      S-Reits investors need to have that ultra patience and confident in the company business in order to get the rewards and time frame is never a constraint for that.

      As mentioned, Singapore has an unique situation in which interest rate rise will be slower than rest of the world. Rest of the world hike rate to fight inflation while MAS tweet the SGD to combat it and hiking of interest rate will be last resort. Due to this fact, Singaporean putting money in banking still do not enjoy the maximum benefit due to interest rate hike.

      One must have clear objective and know the downside risk when investing in S-Reits if not S-Reits is not suitable for you.

      I gave you 2 examples of my S-Reits holding. I have 2 S-Reits bought before the 2007 crash and without any doubt stock prices sank below my cost price thereafter. Then a lot of negative on S-Reits due to concern of their ability to refinance the debt. I continued to have confident in them against all those negative analysis. 1 of the S-Reits managed to overcome the refinancing woes and now through the dividend collected since then that is amount to at least 40% of the original capital already and not to mention the capital gain I have been getting now with current price. The 2nd S-Reits does not have that refiancing woes as the 1st but the strong point is the business is in health care sector and that is something ultra defensive. As of now, the dividend collected already more than 40% of the original capital and not to mention the huge capital gain I am getting now.

      The moral of the story in investing in S-Reits is you must know the fundamental (not just looking at ratios, balance sheet, etc) but out of the box type of thinking and have confident in the management to ride over crisis period.

      The question "Is there any good news for REITs? I ain't see one" to me appear that you do not have a strong clear objective in investing in S-Reits