Feel like shorting REITs

[swakoo]

During Jun-07, the Average Yield (all REITs) = 4.249% vs Now = 6.465%.

As well, the benchmark 10-yr SGS was 2 to 3% then vs Now ~1.4%.
So yield spread over virtual risk free was ~2% vs Now ~5%

[Image: yieldcurve_10yr.gif]

[tanjm]

The yield of a reit with average leasehold of 40 years is different in quality from one with an average leasehold of 80 years even if all else equal. You probably should lop a percentage point off the industrial reits and some of the others for that reason alone (which begs the question of why Saizen is in the 7% league with its freehold property but that's another story).

While it is true that Reits historically yield 200-300bp above 10Y government bonds in many countries, this is an abnormal time. People still fear the return of the worse days of the GFC most likely. Trading volumes in SGX are pretty low.

However, it might be true that on a relative basis, DBS (for example) is underpriced compared with say FCT. If one had the ability to hold low cost, long term shorts, one might be tempted to do relative value trading (shorting one and buying the other).

[changwk]

Besides the yield being unattractive, why is investing REITs not a good idea?

[d.o.g.]

If one had the ability to hold low cost, long term shorts, one might be tempted to do relative value trading (shorting one and buying the other).

During 2007, at my old firm, we could borrow CMT scrip from Goldman Sachs for only 1% per year. Very cheap, as CMT was widely held and highly regarded despite yielding only about 3%. We know what happened after that. Sadly, I do not run as much AUM today, so Goldman Sachs won't return my call.

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Besides the yield being unattractive, why is investing REITs not a good idea?

Read this thread:

http://www.valuebuddies.com/thread-2346.html

There are some discussions in it about the issues behind investing in REITs.

[sgd]

nowsadays reits not very good yield, I have non-reit stock giving 10%, lately I found another one potential 11%. Look harder now can find good yield stocks.

[swakoo]

However, it might be true that on a relative basis, DBS (for example) is underpriced compared with say FCT.

DBS (red line) has certainly been badly under performing FCT (green line) for the past 3 years - see chart below. It is even under performing the STI (blue line). Not too sure if this translates into underpricing. It could just be due to poorer fundamentals.

[Image: z?s=%5eSTI&t=5y&q=l&l=off&z=l&c=J69U.SI,...&region=US]

[valuenewb]

During Jun-07, the Average Yield (all REITs) = 4.249% vs Now = 6.465%.

As well, the benchmark 10-yr SGS was 2 to 3% then vs Now ~1.4%.
So yield spread over virtual risk free was ~2% vs Now ~5%

[Image: yieldcurve_10yr.gif]

Isn't this exactly the reason why one shouldn't short REITS?

It's all about opportunity costs. With all the QEs and all the elections coming, the market will be flooded with money looking for returns. The spread over RF is still 5%, which suggests that it's not about to reach the end yet.

Second, all the dilutive rights that happened in 08/09/GFC resulted from less than solid foundation (CMBS, high leverage).

Can that happen again? Yes, certainly.
Is it likely to happen again? Low chance of it as they have learnt their lessons and have spaced out the maturity of their debt into the future.

Don't get me wrong. I was never into REITS and still not into REITS. I might have missed the boat but I certainly won't want to try to sink them/shoot them down.

[WolfT]

Besides the yield being unattractive, why is investing REITs not a good idea?

Since all Reits have to give out 90% of earnings, that means they have very little money for acquisition unless they do more placement or more loan... vicious cycle and i cannot see the growth in the future. Like a person who keep on maxing out his credit card and e problem only surface when all his credit card has been max out!
I cannot take it when i reach 55 and they come to me telling me they need to do placement be it at a cheaper price!
You will start to see the damage when interest rate rise which make their borrowing cost more expensive.

[Temperament]

AS interest rate rises, the market will most probably price the REITS accordingly in order to maintain more or less the same dividend yield; If everything remains equal. This is the time that you can see AH KONG's sponsored Reits most probably still can borrow funds from the Market one way or another. The recent GFC was a good example.
i understand some people never can accept REITS just like i can not accept insurance annuity or CPF LIFE.
But if a financial product is unable to benefit or suit some of the people, it will soon "disappear"
i think the same with insurance annuity.
We all have our own likings or preferences.

[KopiKat]

A report by MayBank-Kim Eng on this subject,

http://www.remisiers.org/cms_images/rese...009121.pdf