Sunday, May 24, 2015

REIT Symposium 2015 Post Mortem

So, yesterday was the REIT Symposium 2015 at Suntec Convention. As a shareholder of Suntec REIT, I approve.

I have to say, I own quite a few REITs, and I do like REITs a lot. In my personal capacity, I would never, ever buy a physical property for an investment. I would rather buy REITs. I think my stand on this has been pretty clear and frequent about this. Buy a rental property and get 3% gross and 2% net? Thanks, but no thanks.

It is not to say that REITs is the more suitable investment for everyone. It isn't and some people just aren't meant for stock investing. The same people that don't invest in stocks should also not touch REITs. The volatility will kill them. I've read a shit ton about REITs including the REIT Bible, so I think I understand what is the shit that I could get into, and I'm okay with the risks I'm taking. Do other people getting into REITs know? I feel that they do not.

So, being a big believer of REITs as a mainstay asset class in my portfolio, I attended this symposium. Of course being a nobody, I registered and attended in my personal capacity.

Unfortunately, I overslept so I arrived at the tail end of SPH's CEO Susan Leng's talk. I can't say for sure what she was talking about, but all I knew was that the audience was dozing off. I had just woken up and I felt like sleeping after I entered!

I took a seat beside an auntie in the back during the transition to Rusmin Ang's talk.


As you can see, the place was pretty much packed.

Rusmin gave a great talk that was a good primer for REIT investors (and also for his course. no qualms of course, you need to make money). I think the main takeaway from his talk was that looking purely only at dividend yields and P/NAV is not enough to make a good decision on a REIT.

After the lunch break, the crowd thinned out a lot.

David Kuo was the best speaker in my opinion. He gave a very clear disclaimer and repeated it throughout. He did a great interactive exercise to once again drill down the point that PRICE OF A STOCK IN IRRELEVANT. He was also the definite crowd pleaser by sharing his own personal picks of REITs. (which is unfortunately, what most of the crowd wanted to know: What to buy?)

Mr Koh from AIMS AMP REIT was not too bad. It's nice seeing a CEO come down and talk about his company. He was very formal, prim and proper and I think I am quite sold that it is a proper REIT, and not a fly by night company.

However, Mr Wilson Ang from Viva Industrial Trust outshined him. He was a very good speaker and his presentation was not as dry. He also mentioned the oncoming supply of strata-titled industrial space, which I am very aware of. His points regarding them are quite valid, especially the positioning of the company. I am quite impressed.

Eric Khaw from Nikko AM probably had the worst presentation of all. Not only was his content highly technical and complex with a lot of jargon, he presented it like a robot. The entire crowd was about to pass out. The content was good, no doubt, but unfortunately as a money manager he has no choice but to follow analyst consensus view. I felt that too much things was being "hoped" for, such as the relationship between the SGD and visitor arrivals. Forecasts say weakening SGD. I would disagree.

Finally, there was a panel discussion with Vincent Wee from CapitaLand, Sonny Tan from Reitas, Ivan Looi from RHB Research and Stephen Finch from SRE Capital. I thought this was actually the best part of the entire symposium. It was a shame that the hall was only perhaps 40% full compared to the hella boring presentation by SPH CEO.

One thing that Sonny said that really struck me was how the government has loosened up their control and role in urban development and sort of passed it over to REITs to renew existing infrastructure. By allowing investors to continually and opportunistically profit from upgrading, improving and maintaining quality urban infrastructure, the outcome has surpassed anything that government planners could have hoped for. Case in point is how strata titled properties are so much less lucrative than their wholly managed counterparts. Another point to capitalism and the free markets!

Sonny also flouted with the idea of an S-REIT ETF, which is something that I've actually talked to my friends about. Perhaps if Singapore manages to attract a lot more listings with more assets. I personally don't see this taking off. Interesting idea though.

Vincent Wee, coming from CapitaLand, focused on preaching that investors should not only look at dividend yields to make their choices, but to also look at the history and performance of REITs and their ability to grow. Of course he said that, because the Capita REITs are all amongst the lowest yielders, but fundmentally they are great. The price you have to pay though....

Ivan Looi emphasized that for retail investors, the only advantage that we have against managed money is that we DO NOT have to always be in the market. If the market is at nose-bleed valuations, we are free to cash out and wait, because we are not compelled to be in the market. When the risks are high, get out, because retail can, but institutions cannot. I wholly agree with him.

He also talked about avoiding paying rich valuations for companies and highlighted that the biggest risk that REIT investors take - paying an unwarranted high premiums on a company, and having that premium permanently disappear. Again, I agree with his statement. His quick and dirty screening method is anything under 4% is insane. With a historical yield spread of 3.9%, anything under 4% would be overvalued. I think this is a bit too simplistic, but I can't agrue with it as a good rule of thumb. Any REIT under 4%? Run away.

Stephen Finch was the most general and the most pragmatic of the lot. He kept emphasizing diversification and personal risk tolerance, which I think is paramount to the retail investor to understand. One of the things he said which I want to repeat is how REITs behave like "equity in the short term, but like property in the long term". His final closing comment that make me tear a little? "If you invest in REITs for the long term, it's as good as gold". Hehe. As good as gold.

All in all, I thought that the REIT symposium is an excellent primer for people who are genuinely interested in REITs as a long term investor. Unfortunately, 70% of the crowd were uncles and aunties who seem to think that REITs are fixed deposits with 6% yield. This will not end well. Brace yourself REIT investors, retail is coming.

One thing I like to personally add is regarding the "white elephant in the room" that was mentioned like every 15 minutes. Interest rates have very little effect on REITs in the long term. Interest rates affect bonds, and not REITs. Any short term weakness caused by rising rates is an opportunity to load up on them suckers. The correlation of REITs to bonds is almost perfectly zero. Interest rates do not affect each asset class in the same ways.

Even being quite knowledgeable in REITs prior to attending, I think I still learnt some new things, while reinforcing some of the more common mistakes to avoid and some of the correct ways of thinking about REITs.

If there is a REIT symposium next year, I might attend it. Just post the damn schedule online and don't make me sit through another painful talk by the Nikko AM guy. More cute girls at the booths would be nice too. And the aircon not so cold. K thanks bye.

10 comments:

  1. Whatever distributable income to unitholders is after payment of interest on existing loans. Interest cover (NPI / Interest expense) is around 6x-8x in general for REITS. If interest rates rise, distributable amount will drop. To maintain the Div Yield, the REITs price might drop as well. Can elaborate more on why you say interest rates don't affect REITs?

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    Replies
    1. Hi Raymond,

      I said that interest rates don't affect REITs in the long term.

      In the short term, like you mentioned, interest rate expense will increase and reduce net income. That would spook speculators / investors and raise selling pressure.

      However, if rising interest rates are because of increased economic activity and inflation, upward rental revisions will kick in, but later.

      I see it as just a lag, which is why I would be interested to buy into price weakness if it is caused by the "white elephant in the room". I think people will overestimate the negative effects of rising interest rates, and I would gladly buy over from them if they are selling at the right price.

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    2. Ahh yes. I guess we need to be reminded that interest rate rises mainly due to increased in economic activities. After all, the U.S. FED increases its rates only when it's confident that the economy is growing and taking off.

      Very good point indeed :)

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  2. Sigh... I was wondering why my comment kept disappearing... I was thinking that it can possibly be deleted.

    My apologies if I had offended your senses. I was hoping that you tell me much more about your views. There's nothing really wrong about being disagreed upon. I have made my own fair share of mistakes in investment and in fact being able to be open about mistake actually makes one a better investor.

    You said " In my personal capacity, I would never, ever buy a physical property for an investment." I hope that if the day ever comes, when you actually decides to buy a property for investment, remember that it is because you realise that it can indeed be an investment that makes sense.

    All the best to you in your investment journey.

    Regards.

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  3. *thinking that it can't possibly be deleted.

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    1. Hi Anon,

      I can assure you that I did not delete your comment. I received notification of it multiple times in my inbox. I am experiencing some problems with Google today.

      "Hi,

      Don't mind me staying this. I felt that you dismissed direct investment into property too easily. I'm assuming that you have not own a property for investment thus your lack of knowledge in this area.

      Assuming that one can obtain a $1m property which gives a gross yield of 3.5%, taking a 80% LTV mortgage at 1.5% and taking into consideration 0.5 mth rental commission, monthly maintenance fees and property tax, the net yield is about 1.6%.

      Now that paltry 1.6% is even worse than the 2% example that you gave. But people forget that the 1.6% is return on asset. If you consider the return on equity, it is actually 8%.

      Now the cons of investing directly into a property is
      1. You need a large amount of capital
      2. The 8% return is largely locked up in the form of capital repayment thus you may not have much in terms of free cashflow. In fact depending on what is your loan tenure and how much interest rates increase, you may even end up cash flow negative.
      3. Concentrated risk as it is only 1 property.

      Pros
      1. You don't have to think about reinvestment of cash returns as it is directly ploughed back into your investment in the form of capital repayment.
      2. The compounding effect of your returns is already taken care of since property is a hedge against inflation. (note: I am referring to normal circumstances. If you buy at the peak, good luck to you.)

      I personally are invested in a few properties but I am also vested in reits. There's pros and cons to both types of instruments.

      Its good that you are sharing your knowledge but do be aware that there are others who might take your advice literally.

      Regards."

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    2. Hi Anon,

      Your point of leverage regarding direct property investment is a very, very good point, where yield on equity can offer similar returns to a REIT, ie 8%.

      However, because of leverage, the risk reward ratio skews negatively. Stocks / REITs can also be leveraged through a broker to juice up returns (Maybank KE offers 3.5X leverage, I'm not sure about the others), but the risk of course becomes a lot larger because of the leverage. Leveraged returns of 8% doesn't assume the same risk as an unleveraged investment also giving out 8%.

      For me the pros (for REITs) and cons are such:

      Pro:
      1. Property diversification with a single counter is possible
      2. Sub-sector diversification by adding other counters is easily done as well
      3. Small initial capital investment is possible
      4. Additional capital injections also can be small
      5. Capital divestment in parts is possible
      6. Ability to liquidate assets immediately, if necessary
      7. Tax-incentive of REITs boosts returns
      8. Managerial fees are already taken into account (commission of agent in direct property)
      9. Expenses are already taken into account (monthly estate fees + ad hoc repairs / maint)
      10. Requires zero interaction with renters
      11. No loan means that market declines would never require a margin call (loan top up)
      12. No loan means freedom in job / lifestyle because there isn't a monthly mortgage to repay

      Cons:
      1. Inability to enjoy any of the physical benefits of the real estate
      2. A less tangible form of asset (ownership via security vs direct physical ownership)

      Of course, the 1st con is the biggest reason why people own multiple properties and I understand that there can be immense personal value that people place on having multiple properties. In my personal circumstance, I rather not confuse an asset for personal consumption with an asset for investment returns.

      Don't get me wrong, I love to hear other opinions. Hope there is no misunderstanding.

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    3. Oh, and another con for REITs is less capital gains compared to leveraged direct property investment.

      If the property market is depressed and capital gains is the main prize, using leverage and directly investing and catching the bottom would give back much better returns compared to buying the bottom in REITs.

      As a long-term, hassle-free investment, I think the case for REITs is quite compelling, assuming you can bear the volatility.

      Delete
  4. Oh my bad then GMGH,

    Glad that you clarified. My apologies for assuming the negative.

    ReplyDelete

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