Analysing REITS

[swakoo]

Are Reits correlated to GOV's Bonds when interest rates rise?

S-reits was introduced only around end 2002. So let's take a look at interest rates since then.

[Image: interest-rate&type=line&title=SINGAPORE%...EST%20RATE]

The only period of sharp interest rate increase since then is 2003-2007 when SIBOR went up in tandem with the Fed funds rate. Now let's take a look at how the 10-yr SGS performed.

[Image: government-bond-yield&type=line&title=SI...ND%20YIELD]

In spite of the interest rates going up over this period 2003-7, the 10-yr SGS went roughly sideways - in tandem with the 10-yr UST (chart below).

[Image: government-bond-yield&type=line&title=SI...ND%20YIELD]

**********

So how did S-reits fare during this period of interest rates going up 2003-2007?

I don't have a chart for this but those in the market then will probably remember that they mostly shot up like a rocket...

In summary, over this period 2003-7: interest rates up, govt bonds sideways, reits up. However this relationship is probably unique for this particular period and may not be a general model of correlation.

[AlphaQuant]

Rather than looking at a time series to derive correlation (which is just a number), one is better served going back to first principles.

Simplifying valuation of an asset:

price is proportional to (earnings* growth - debt*int rate)/(riskfree rate+asset risk premium)

as rates rise, debt*int rate is -ve to price
risk free rate rises is -ve to price
let's call asset risk premium a scratch

the crux of the matter then is whether earnings growth is sufficient to overcome the 2 -ve factors when rate rises, and that differs for each counter. This is different from bonds which by virtue of being a fixed income instrument (hence no chance of earnings growth), has to be -vely correlated to interest rates.

So i don't necessary think that REITs are -vely correlated with rates - the essence is to find something where earnings growth > debt*rate rise+ discount factor from rising riskfree rate.

It's rather tough, since it's 2 -ve factors against one, but it's not impossible.

[Temperament]

Are Reits correlated to GOV's Bonds when interest rates rise?

S-reits was introduced only around end 2002. So let's take a look at interest rates since then.

[Image: interest-rate&type=line&title=SINGAPORE%...EST%20RATE]

The only period of sharp interest rate increase since then is 2003-2007 when SIBOR went up in tandem with the Fed funds rate. Now let's take a look at how the 10-yr SGS performed.

[Image: government-bond-yield&type=line&title=SI...ND%20YIELD]

In spite of the interest rates going up over this period 2003-7, the 10-yr SGS went roughly sideways - in tandem with the 10-yr UST (chart below).

[Image: government-bond-yield&type=line&title=SI...ND%20YIELD]

**********

So how did S-reits fare during this period of interest rates going up 2003-2007?

I don't have a chart for this but those in the market then will probably remember that they mostly shot up like a rocket...

In summary, over this period 2003-7: interest rates up, govt bonds sideways, reits up. However this relationship is probably unique for this particular period and may not be a general model of correlation.

Thank you very much.
We all know market doesn't always base on logic alone. So that the seemingly "illogical illiterates" have a chance in the market.

i remember. i bought the 1st REIT in the market which failed to IPO in the first attempt. IIRC, it was due to yield offer(DPU) was rejected by the market. Singapore Market was still Swakoo about Reits then. However it succeeded in the 2nd attempt and of course the rest is history until now.
Going forward, who can really know how interest rates going to affect REITS? As interest rates rise may be off-set by many other factors in the market.
Who really knows?
If only we know.
i wish i know.
"Nothing is cast in stone in the market", says the "Old Saw".

[Temperament]

Rather than looking at a time series to derive correlation (which is just a number), one is better served going back to first principles.

Simplifying valuation of an asset:

price is proportional to (earnings* growth - debt*int rate)/(riskfree rate+asset risk premium)

as rates rise, debt*int rate is -ve to price
risk free rate rises is -ve to price
let's call asset risk premium a scratch

the crux of the matter then is whether earnings growth is sufficient to overcome the 2 -ve factors when rate rises, and that differs for each counter. This is different from bonds which by virtue of being a fixed income instrument (hence no chance of earnings growth), has to be -vely correlated to interest rates.

So i don't necessary think that REITs are -vely correlated with rates - the essence is to find something where earnings growth > debt*rate rise+ discount factor from rising riskfree rate.

It's rather tough, since it's 2 -ve factors against one, but it's not impossible.

Well put.

[Greenrookie]

Rather than looking at a time series to derive correlation (which is just a number), one is better served going back to first principles.

Simplifying valuation of an asset:

price is proportional to (earnings* growth - debt*int rate)/(riskfree rate+asset risk premium)

as rates rise, debt*int rate is -ve to price
risk free rate rises is -ve to price
let's call asset risk premium a scratch

the crux of the matter then is whether earnings growth is sufficient to overcome the 2 -ve factors when rate rises, and that differs for each counter. This is different from bonds which by virtue of being a fixed income instrument (hence no chance of earnings growth), has to be -vely correlated to interest rates.

So i don't necessary think that REITs are -vely correlated with rates - the essence is to find something where earnings growth > debt*rate rise+ discount factor from rising riskfree rate.

It's rather tough, since it's 2 -ve factors against one, but it's not impossible.

Thank you! Very good overview!

For trusts that ammortize loans over their loan period, that have one more variable in their favour, the reducing loans...

But which trusts ammortize their loans?

[AlphaQuant]

For trusts that ammortize loans over their loan period, that have one more variable in their favour, the reducing loans...

But which trusts ammortize their loans?

IMO, all trusts use debt, so even if they ammortize etc, it's just getting from very leveraged to slightly less very leveraged since amortisation works thru time.

The crux though, is to work thru the math and make sure the stuff is sustainable.

I did an exercise recently and concluded generically (so pls take this with a large pinch of salt) that a trust with a >40% gear, will need to grow its income by 7-10% p.a. just to beat the 2% interest rate rise that CBO is projecting. (i.e. effect of growth > rise in interest payment + capital losses from higher discounting from risk free rate)

So if you are a bloke with a much higher gear than 40%, and has never grown faster than 7% in the past ripe years, then it's probably wiser to say sayonara since it is mathematically impossible to win.

[specuvestor]

i remember. i bought the 1st REIT in the market which failed to IPO in the first attempt. IIRC, it was due to yield offer(DPU) was rejected by the market. Singapore Market was still Swakoo about Reits then. However it succeeded in the 2nd attempt and of course the rest is history until now.
Going forward, who can really know how interest rates going to affect REITS? As interest rates rise may be off-set by many other factors in the market.
Who really knows?
If only we know.
i wish i know.
"Nothing is cast in stone in the market", says the "Old Saw".

Hi Temperament

You managed to buy a REIT without an IPO?

IIRC CMT was the one that tried IPOed twice, under gahmen directions of course. In between they resolved the taxation issue which gave rise to the abolishment of S44. CMT successfullt launched after it was not taxable at source.

[Temperament]

SGX have "standard established" Blue Chips in stocks. So currently, Reits as a group itself, which of them can be considered as "Blue Chips Reits"?
Anyone like to elaborate for the benefit of illiterates like me.
Thank you.

[Temperament]

i remember. i bought the 1st REIT in the market which failed to IPO in the first attempt. IIRC, it was due to yield offer(DPU) was rejected by the market. Singapore Market was still Swakoo about Reits then. However it succeeded in the 2nd attempt and of course the rest is history until now.
Going forward, who can really know how interest rates going to affect REITS? As interest rates rise may be off-set by many other factors in the market.
Who really knows?
If only we know.
i wish i know.
"Nothing is cast in stone in the market", says the "Old Saw".

Hi Temperament

You managed to buy a REIT without an IPO?

IIRC CMT was the one that tried IPOed twice, under gahmen directions of course. In between they resolved the taxation issue which gave rise to the abolishment of S44. CMT successfullt launched after it was not taxable at source.

Sorry for my poor "England". i mean i bought the IPO of CMT at its' 2nd IPO attempt.

[gutman]

I understand all the above discussions was on the impact on Reits should interest rate rise.

I would like to share what I read from Motley Fools today on interest rate. It is not related to Reits, though. It questions if interest rate would rise when Fed tapers. One of the statement I quote herewith:

In a recent interview with Swiss Finanz und Wirtschaft, this what Marks had to say on the topic: “Most people agree that there is a very high chance that the Fed will continue to taper its bond purchases. But we don’t know what the effect will be. In other words: Everybody thinks tapering will make interest rates rise. But maybe interest rates already have risen in anticipation of the tapering, so that the event of the tapering itself will not cause a rise. One thing you can never be sure of in the investment world is <<if A, then B>>. Processes and linkages are not always predictable.”

For the full article : http://www.fool.sg/2014/03/03/the-moveme...-we-think/