Investment advice

[Temperament]

Hello everyone

Thank you for all the advice.
Really helpful for me to hear the thoughts of other investors.
I will keep rights issue in mind.

I think I will pare down some of my more vulnerable REITs that has high debt and/or low % of fixed borrowing rates. Hopefully that would reduce capital loss from rising rates, as well as the chance of undesirable rights issue. I will keep the safer REITs to maintain some passive income.

The Fed chairperson said that interest rates may rise 6 months after the end of tapering, so I will adopt a wait and see approach this year with regards to REITs. May accumulate a little more if there are dips to the level in Feb.

Dividend Warrior, nice to see someone in the same situation as me.
I looked at your portfolio on your blog and noticed that you are holding a fair amount of industrial REITs.
I think industrial REITs are generally regarded to be higher risk because:
- The property lease is shorter, so the manager need to keep rising equity to recycle their property
- Difficult to increase rent, so more vulnerable to interest rates increase
May I know what is your take on this? (If you do not mind sharing)

Thanks!

See!
Well done already.

My take:-
"He who hesitates will lose".

i think this is favourite quote of the SAMURAI.

But i think i like
“知 彼 知 己， 百 戰 不 殆； 不 知 彼 而 知 己 一 勝 一 負； 不 知 彼 不 知 己， 每 戰 必 殆 “
In England:-
"Know your enemies and know yourself, you can win the battles.
If you only know yourself, but do not your opponent, there is no guarantee of winning.
If you know neither yourself nor your enemy, you endanger yourself and will lose for sure."


Or my own thinking, "He who prepares will win".

Enjoy your investment journey.

[csl123]

I would like to hear your views on the following:
- Do you agree that REITs are likely to drop more? Is it advisable to liquidate part or all now while prices are still relatively high?
- Is it a good idea to invest a lot of money in a index fund like STI? Are there better alternatives for a casual investor?

Thanks!

The rise in risk free rates increase the cost of capital if you follow the CAPM. The rise in cost of capital increases the discount rate and reduces NPV of the projected cashflow from the REIT. Not exactly correct that a spread is maintained between yield and risk free rate.

However, the bigger issue at hand is the ability of the REITs to service its interest payments when the Fed's rise interest rates.

The inability for REITs to service rising interest rate will :
1) reduce DPU as more cash is used to service interest payments
2) potentially result in a rights issue of the REIT. Not exactly beneficial for REIT holders, unless it is use for acquisition of assets. To rise equity to service interest rate and reduce gearing is a no-no.
3) limit the ability to refinance. You can research and find that most of the REITs in Singapore are quite highly geared (>30%).

In general, investing in an index ETF is a good idea when the market dips. However, the options of ETF are limited in Singapore. You can invest in unit trust funds with unique investment themes. No point going for geographical funds as you might as well go for ETFs listed in US.

[CY09]

In addition, many REITS use the Capitalisation rate valuation (especially commercial and retail REITS) to value their assets. In the current interest rate environment, the risk free rate is quite low, in turn a lower cap rate and thus higher valuations for properties.

However, if interest rise, the risk free rate will rise, which leads to REITS property having to be revalue downwards. With a lower asset value base, their debt-to-asset ratio increases, which restricts their ability to gear up or in some cases having to issue new shares to pay down their debts to ensure they do not exceed their gearing limit.

[Boon]

In addition, many REITS use the Capitalisation rate valuation (especially commercial and retail REITS) to value their assets. In the current interest rate environment, the risk free rate is quite low, in turn a lower cap rate and thus higher valuations for properties.

However, if interest rise, the risk free rate will rise, which leads to REITS property having to be revalue downwards. With a lower asset value base, their debt-to-asset ratio increases, which restricts their ability to gear up or in some cases having to issue new shares to pay down their debts to ensure they do not exceed their gearing limit.

What will higher interest rates mean for real estate?

Analysis from our Global Real Assets (GRA) Research team indicates:
In the short term, the impact of rising rates on real estate capitalization (cap) rates is likely to be minimal.
• History has shown little correlation between interest rates and real estate cap rates. This is understandable: Rising rates are generally consistent with an improving economic environment in which vacancies can be filled, rents raised and real estate cash flows enhanced, damping the negative impact of rising rates................

https://am.jpmorgan.com/blobcontent/416/...11_924.pdf

[gzbkel]

Hello csl123, CY09, Boon

Thanks alot for all the information! Many things for me to read up and to google.

[gzbkel]

But i think i like
“知 彼 知 己， 百 戰 不 殆； 不 知 彼 而 知 己 一 勝 一 負； 不 知 彼 不 知 己， 每 戰 必 殆 “
In England:-
"Know your enemies and know yourself, you can win the battles.
If you only know yourself, but do not your opponent, there is no guarantee of winning.
If you know neither yourself nor your enemy, you endanger yourself and will lose for sure."


Or my own thinking, "He who prepares will win".

Enjoy your investment journey.

Hi Temperament
That's a very famous saying. I play some strategy games and have always found it to be applicable. Interesting to use it in a investing context.
Thanks for the kind words.

[csl123]

In addition, many REITS use the Capitalisation rate valuation (especially commercial and retail REITS) to value their assets. In the current interest rate environment, the risk free rate is quite low, in turn a lower cap rate and thus higher valuations for properties.

However, if interest rise, the risk free rate will rise, which leads to REITS property having to be revalue downwards. With a lower asset value base, their debt-to-asset ratio increases, which restricts their ability to gear up or in some cases having to issue new shares to pay down their debts to ensure they do not exceed their gearing limit.

What will higher interest rates mean for real estate?

Analysis from our Global Real Assets (GRA) Research team indicates:
In the short term, the impact of rising rates on real estate capitalization (cap) rates is likely to be minimal.
• History has shown little correlation between interest rates and real estate cap rates. This is understandable: Rising rates are generally consistent with an improving economic environment in which vacancies can be filled, rents raised and real estate cash flows enhanced, damping the negative impact of rising rates................

https://am.jpmorgan.com/blobcontent/416/...11_924.pdf

Rising rates are generally consistent with rising inflation, not necessary improving economic environment. The federal reserve uses interest rates for inflation targeting. It increase interest rate when inflation goes above 2% (generally believed to be the inflation target) . It is possible that there is rising inflation without an improving economic environment (1970 - 1980s). Usually happens in a supply shock (i.e spike in oil prices)

[Temperament]

In addition, many REITS use the Capitalisation rate valuation (especially commercial and retail REITS) to value their assets. In the current interest rate environment, the risk free rate is quite low, in turn a lower cap rate and thus higher valuations for properties.

However, if interest rise, the risk free rate will rise, which leads to REITS property having to be revalue downwards. With a lower asset value base, their debt-to-asset ratio increases, which restricts their ability to gear up or in some cases having to issue new shares to pay down their debts to ensure they do not exceed their gearing limit.

What will higher interest rates mean for real estate?

Analysis from our Global Real Assets (GRA) Research team indicates:
In the short term, the impact of rising rates on real estate capitalization (cap) rates is likely to be minimal.
• History has shown little correlation between interest rates and real estate cap rates. This is understandable: Rising rates are generally consistent with an improving economic environment in which vacancies can be filled, rents raised and real estate cash flows enhanced, damping the negative impact of rising rates................

https://am.jpmorgan.com/blobcontent/416/...11_924.pdf

Rising rates are generally consistent with rising inflation, not necessary improving economic environment. The federal reserve uses interest rates for inflation targeting. It increase interest rate when inflation goes above 2% (generally believed to be the inflation target) . It is possible that there is rising inflation without an improving economic environment (1970 - 1980s). Usually happens in a supply shock (i.e spike in oil prices)

Is any country in this state (stagflation?) now. Or coming to?