Stocks versus property. Why I prefer stocks over property

[freedom]

From the perspective of ease of managing risk, will the conclusion still valid with the REITS? REITS is easily available to middle-class as well, the difference is on the underlying asset.

IMO, REITS seem safer than stocks

This is true. It is easier to manage risks with REITs than with property. Unfortunately, REITs gave me a lasting bad impression in 2008 financial crisis when they asked for so much money from shareholders that it negated the high dividend yields during the pre-crisis period.

REITs have to pay 90% of their earnings in dividends to shareholders. Several REITs' current ratio is below 1. Their highly geared nature plus the inability to retain earnings means they have to ask for money from shareholders in a credit crisis because they cannot get money from banks. I am not even sure if their high dividend yields are sustainable for income investors like retirees. A more sustainable dividend yield of at least 3% is when a medium-sized company with growing earnings and room to grow pays a modest 20%-30% of earnings in dividends. If one has the foresight to buy and hold onto such a company, in 10 years' time with the compounding effect, the dividend yield can rise to 5%-10% even though the dividend payout rate remains at 20%. The earnings growth of REITs is stunted by the requirement to give out 90% of earnings to shareholders. To grow, REITs borrow. If they borrow too much during a credit boom, shareholders got to bail them out in the eventual credit bust.

It may not be healthy for the economy to see REIT yields doubling from here. When rental yield goes up, the cost of living and cost of running a business goes up. Will this not stunt the growth of the rest which represents more productive businesses, not to mention our own standard of living? This is one reason I would like to see more real companies IPO in Singapore rather than business trusts/REITs profiting from rent-seeking less productive economic activity.

exactly my sentiment.

Anyone regarding REIT as a long term investment is a bit insane, especially if you depend on it for income. Every now and then, REIT will ask money from its investors and very likely, there would be dilution to existing shareholders.

REIT is only a speculation for good times, in my investment dictionary. But if you know when it is a good time, you don't need REIT to be a good investor. So Why there is such an asset class in Singapore, I still don't understand.

[CityFarmer]

Well, I partially agree the reasoning on property. I agree the hurdles on a middle-class investor, but is there mean(s) to reduce the risk? I don't have a good answer yet. I knew friends solved the capital (or debt) issue by partnering i.e. tenants in common. Will the same enable diversification i.e. participant on more than one property at difference locations or types?

I agree REIT may not meet retirement needs, which regular income is a must, and wary of pay-back via right.

I guess partnerships is one of the solutions. But we can always say no if not comfortable.

By the way, getting a wife is also a form of partnership. You know, partnerships have their own problems. Disputes with partners are quite common. Divorce is a major cause of poverty among men, thanks to Woman's Charter. Nevertheless, I got married despite the risks (huge cost of correcting mistake, impossible to diversify)

Well, I am providing option(s) or mean(s) not highlighted in your previous postings, not suggesting a right way we should do.

Probably i should avoid using agree/disagree in future posting. Hmm... IMO should be a better one

I respect your choice.

[swakoo]

Just as with stocks, there are winners and losers in reits. Chart below shows STI vs a bunch of reits that outperformed the STI and a bunch that underperformed:

[Image: z?s=%5eSTI&t=5y&q=l&l=off&z=l&c=C2PU.SI,...&region=US]

The winners:
- have strong balance sheets and sound prudent capital management so that dilutive rights issues were not necessary even in the credit crunch during the 08/09 GFC
- sustainable dpu's even over the GFC period
- increases in dpu not just from raising rentals (which in the extreme would not be sustainable in the long term) but also in large part from more efficient usage of floor space and from yield accretive acquisitions

The losers have the opposite attributes.

[freedom]

Just as with stocks, there are winners and losers in reits. Chart below shows STI vs a bunch of reits that outperformed the STI and a bunch that underperformed:

[Image: z?s=%5eSTI&t=5y&q=l&l=off&z=l&c=C2PU.SI,...&region=US]

The winners:
- have strong balance sheets and sound prudent capital management so that dilutive rights issues were not necessary even in the credit crunch during the 08/09 GFC
- sustainable dpu's even over the GFC period
- increases in dpu not just from raising rentals (which in the extreme would not be sustainable in the long term) but also in large part from more efficient usage of floor space and from yield accretive acquisitions

The losers have the opposite attributes.

I am looking forward to another cycle. I believe some of those outperformed STI will underperform STI.

[KopiKat]

Just as with stocks, there are winners and losers in reits. Chart below shows STI vs a bunch of reits that outperformed the STI and a bunch that underperformed:

[Image: z?s=%5eSTI&t=5y&q=l&l=off&z=l&c=C2PU.SI,...&region=US]

The winners:
- have strong balance sheets and sound prudent capital management so that dilutive rights issues were not necessary even in the credit crunch during the 08/09 GFC
- sustainable dpu's even over the GFC period
- increases in dpu not just from raising rentals (which in the extreme would not be sustainable in the long term) but also in large part from more efficient usage of floor space and from yield accretive acquisitions

The losers have the opposite attributes.

I remembered d.o.g. summarising in one of his post that one of the main reason for the credit crunch faced by many of the REITs during the '08 crisis was the prevalent use of very short term borrowings, which had lower interest rates. But, when the party ended, it became a good lesson for many a REIT manager on your first point ie. Strong Balance Sheet & Sound Prudent Capital Mgmt. Amongst the worst hit were many run by the Aussies who really know how to maximise the use of debts during the good times... I also remembered that in one of your more recent post, you'd pointed out that many of the REITs do have debts that are now better spread out over several years ie. instead of CMBS, it's now more fashionable to issue MTN. So, perhaps it's a bit different this time round... Haha..

As for one particular REIT (C38U.SI) in your chart, I'm rather surprised to see their performance.... I supposed it's rather ironic that their parent's CEO was blasting one of our Wallstraits forum fav REIT (in terms of no. of posts) for Financial Engineering.... Looking back at their price and yield back then, I suppose they have too high a base to overcome, even after all these years...

[swakoo]

As for one particular REIT (C38U.SI) in your chart, I'm rather surprised to see their performance.... I supposed it's rather ironic that their parent's CEO was blasting one of our Wallstraits forum fav REIT (in terms of no. of posts) for Financial Engineering.... Looking back at their price and yield back then, I suppose they have too high a base to overcome, even after all these years...

Yes, it is ironic! Just before the onset of the GFC, that particular reit used a Convertible Bond structure that had a ballooning interest rate payment /principal repayment to justify acquiring a very pricey asset aka Financial Engineering. With the onset of GFC and the credit crunch the resulting high gearing blew up and a massive dilutive rights issue took place. That's why they have well underperformed the STI tho' they started out well outperforming in the early years. Not sound capital management back then but think they have taken this lesson to heart looking at current balance sheet.

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I am looking forward to another cycle. I believe some of those outperformed STI will underperform STI.

In throwing up that chart, I am not suggesting that winners will stay winners or that losers will stay losers. It is a historical view point to illustrate good and bad reits of the past. Things change, especially in today's environment.

[fat al]

So Why there is such an asset class in Singapore, I still don't understand.

Here's my 2c- the first couple of REITs in SIngapore was promoted by the developers because it was a capital management tool for themselves. Offload 70% stake of an asset but earn a management fee on the same asset. Although overall income is reduced, the developer's ROI and ROE is enhanced. If the 30% stake remaining is equity accounted (not fully or partially consolidated), the Group leverage is also reduced as the REIT debt is not captured on the books (only net equity captured). Management control over the asset is still retained by the developer Group. The release of cash/funds allowed the developers to expand to new areas. Essentially, REIT sponsors are kind of "leveraging up" by using other people's money (the REIT investor).

REIT and business trusts' management has less flexibility in terms of capital management- paying out most cash and any new investment requiring new capital raising. This is supposed to enhance corporate governance as new approvals by BOD/shareholders need to be obtained. This is probably the main advantage as it prevents management from retaining cash profits and splurging it unnecessarily (up to your imagination - gold taps in executive bathrooms, expensive art pieces for the reception area).

There is no real advantage of REIT or business trusts structure compared with a financially-disciplined corporate with strong capital management. Then again, not all corporates may have strong financial management.
(Am ignoring the tax advantage of REIT in this discussion as that was probably a policy decision to promote the structure).

Anyone regarding REIT as a long term investment is a bit insane, especially if you depend on it for income. Every now and then, REIT will ask money from its investors and very likely, there would be dilution to existing shareholders.

One way to mitigate the dilution problem is to sell down a portion of existing exposure to fund the rights subscription. This will of course not be a perfect solution given the market volatility and possible odd lot position required.

[freedom]

I am looking forward to another cycle. I believe some of those outperformed STI will underperform STI.

In throwing up that chart, I am not suggesting that winners will stay winners or that losers will stay losers. It is a historical view point to illustrate good and bad reits of the past. Things change, especially in today's environment.

I believe historically REIT in the long term should be an underperforming asset class. I think a few of outperforming REITs have certain unique factors propelling them to outperform. These factors are unlikely to drive their outperformance again as these advantages are gone already in the next cycle.

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Anyone regarding REIT as a long term investment is a bit insane, especially if you depend on it for income. Every now and then, REIT will ask money from its investors and very likely, there would be dilution to existing shareholders.

One way to mitigate the dilution problem is to sell down a portion of existing exposure to fund the rights subscription. This will of course not be a perfect solution given the market volatility and possible odd lot position required.

still you got diluted as you own less percentage of the REIT. The more important thing is that very likely, the distribution would drop after capital raising exercise. That defeats the purpose of REIT as a long term investment and income generation asset.

[paullow]

hi freedom, swakoo n guys,
interesting n enlightning discussion. reinforces wat our expert d.o.g. mentioned earlier abt reits.
just wondering, how then do pple profess to build a fortune on reits.
there are at least 2books on sale popular abt telling pple how the authors build a fortunr buying reits.
does compounding of dividends long term help beat this dilution effect?
my take is that entry price is crux to long term reits holding.
(not vested in any reits)

[Temperament]

my take is that entry price is crux to long term reits holding.

Ha! Ha!
It's a good reminder that all our talk and talk is aiming to do this only:-

“The Essence of Investment Management is the Management of Risks, not the Management of returns”, Benjamin Graham.
“Therefore Proper Allocation of Assets and Entry Level are the 2 most crucial actions.
Nothing you can do is better to Control Risks and Generate profit,” Dick Davis.

And i believe anything in the market can make you money if you only know how. Things that can not make you money will just languish or die a natural death in the market. imo.