Wolf Money(portfolio update end March 2025)part 1
REITs, Developers and The Not Developing
REITs is one of the sectors I am looking for a bargain. After searching high and low for nearly a year, I find two REITs worthy of putting my capital to work. For the background, I made a purchase in some REITs about 2 years ago, but I had to reverse my position after the Fed turned hawkish on the interest rate outlook. There are two continue concerns which have so far deterred me from making more purchase in the REITs space. My commentary applies to the real estate companies which are struggling with the same problems.
One major difference of a developer, they can sell their assets to lower their debt to zero, but it is harder for the REITs because of the structure of the trust. Selling assets in a REITs mean fund managers will get less fees for managing the REITs. The obligation to pay out 90% in order to qualify for tax incentives makes reducing debts significantly almost impossible during the normal course of running the trust. Property sector does look interesting with the 10-year yield coming down. Some property stocks are trading at more than 50% discount to their book value, but do take note that some developers’ gearing ratio are high at above 1x. The merits of undervalued assets holds nothing for investors since many developers are passing on their legacies to the next generation. For example, the “father-son property company” have very high RNAV, but they have been constantly paying very low dividends for many years. As an investor of the property company, one will naturally ask what is in it for me? Shares trading at a big discount to asset value shouldn’t be the only justification for buying the stock. It is an open secret some property companies are value trap with key executives paying themselves millions in compensation. I urge caution on buying those companies.
With Trump’s tariffs slowing down the world economy, buying sentiment will be affected in the residential market. In my observation, there is a slow rise in negative sentiment in local job market. Before I go on, I am not here to rain on your parade, you probably bought your REITs or property stocks with a good amount of research. Some REITs and property stocks are looking interesting and they are close to my price of consideration. As usual no malice in my commentary. Best of luck for your investments.
Interest rates
I continue to search high and low for that one ultimate REITs or property stock which can provide me with a substantial income and capital gains. REITs can be a good investment if one buys them at the right price. First, the renewed inflationary pressure caused by Trump’s tariffs might have on interest rate cuts. REITs are especially sensitive towards high interest rates due to having at least 30% to 45% gearing. The gearing of Singapore’s REITs is markedly higher than those of HK. The rise in interest rates having a negative impact on REITs sector was well reported and REITs sector had a tough few years when interest were high. The major risk might come from Trump’s trade policy. That shift in trade policy had raised enough concern for the Fed to slow down and reassess interest rate cuts. From the inflation data out of US, core inflation has stay up. It is difficult for the US central bank to push the inflation genie back into the bottle under such a backdrop. There are also competition from attractive risk-free investments. I rated 1 in 3 chances for the interest rate going back up again. It will put downward pressure on price discovery on the REITs sector as a whole.
Disruptions and asset quality
Secondly, the potential disruption caused by cheaper locations across the causeway and new property trends like WFH and co-work, causing lower rental for commercial properties. One must agreed with me, not all REITs are set up with the highest quality assets in mind. Judging from the yield of the REITs, it gives one a sense of the risk profile associated with the REITs. High yield comes with higher risk.
With JB-SG Special Economic Zone coming on stream in the next few years, there will be disruptions in demand for industrial space in Singapore. The shorter lease for industrial REITs is another concern of mine. If you observe how Bala’s curve works, depreciation will increase towards the end of the lease. There will be huge fees to the government for renewal on lease expiration if the property comes with an option. The acquisition path for local REITs to grow their dpu is going to be difficult, especially those local industrial properties launched a decade ago on a short 30-year lease with no option to renew. Future securitisation for those short-lease industrial properties will be difficult. Retail REITs faced their old nemesis of online shopping and a strong Singapore dollar. The RTS conundrum will affect shopping malls near border towns. Hotels are facing a slight oversupply as those hotels planned before Covid started coming on stream. The office sector seems to be the odd bright spark as the government has tightened office supply due to WFH trend. There is a general acceptance that a physical office is needed for the returning employees mandated by some employers. Some REITs did financial engineering to save their collapsing prospects by merging to form a larger REIT. I would rather have a good and a bad apple than to have one mediocre apple. It is akin to mixing a glass of clear water with a glass of milk. The result a milky water that neither tastes like water nor milk.
REITs with overseas assets seem to be in a worse position than those having majority of their properties in Singapore. The local malls are having trouble pushing for higher rental to make up for the higher cost associated to running the malls. Many retailers have decided to call it a day due to the substantial rental revisions as reported in the local media. There seems to be some renewed pressure on certain shopping malls REITs. DPU in some cases falling by high single to low double digits. In my opinion, the price in REITs is a tussle with the 10-year bonds. If yield on bond is high, the prices of REITs will be under pressure. Some well run REITs, with their quality assets manages to hold its own. The yield on those REITs are not particularly attractive with yield falling below 4%. Will I like to subject myself to market risk for the mere 4% dpu? Probably not.
I like to see a self-storage reit coming to our market in the future. I believe the trend of smaller homes and small businesses keeping an inventory in a self-storage facility to guard against shipping disruption will bring steady yields to REITs’ holders. As for now, I will continue searching and wish me luck on my next great REITs adventure. God Bless. 🙏
Please consider following us on telegram for the latest update on Lone Wolf investor by clicking on the link below. No form filling, no payment required, no collection of data, no data mining, no hard selling, no obligation.
https://t.me/joinchat/oCgkD3sQFRMzMWM1
Disclaimers
All investments is highly speculative in nature and involves substantial risk of loss. We encourage our reader to invest very carefully. We also encourage reader to get personal advice from your professional investment advisor and to make independent investigations before acting on information that we publish. Much of our information is derived directly from information published by companies or submitted to governmental agencies on which we believe are reliable but are without our independent verification. Therefore, we cannot assure you that the information is accurate or complete. We do not in any way whatsoever warrant or guarantee the success of any action you take in reliance on our statements. All information provided are for education only. Buyer beware,do you own due diligence.
Comments
Post a Comment