Taking Another Look At Singapore Reits
A friend informed me that he has made 18% trading SReits this year which is impressive because I did not think that SReits were all that exciting. But he is an SReit expert with a proven track record in that stuff, delivering vulgar (too good to mention) returns over the years.
Lots of articles on SReits in local financial media, drumming up the hype and recommendations on what to buy.
For SReits are dear to the hearts of all Singaporeans and play a big part in most of our portfolios.
I decided to compare SReits with the rest of the world but ran into too many headwinds even when comparing single Reits or Real Estate and Reits indices for there are too many differences in cross borders accounting rules, mainly in asset depreciation and such.
Japan probably has the safest Reit market because their Reits are required to pay down their principal and interest annually which is an ultra conservative measure that protects the investor/shareholder against asset devaluation in times of crisis.
Singapore Reits, in contrast, do not have the debt pay down requirement and are only required to service interest payments which will leave them exposed even if their Loan to Valuation ratio is limited at 60% much like the Australian Reit market which suffered heavy losses (>40%) during the Lehman crisis which led to a collapse of their NAV and most of them running on negative equity during that period.
So how do SReits fare against global counterparts ?
Surprisingly well. Though do note that I am using the FSSTI Reit Index which comprises of the basket of SReits which excludes Business Trusts like the soon to be launched Fraser Hospitality Trust.
The SReits Index with its market capitalisation of SGD 61 bio, up 125% from 2009, delivered the 2nd highest yield at 5.7% (current /expected 6.25% for the year) which has been more or less its typical return since the height of the financial crisis.
On a price gains, SReits do not look as profitable as the double digit returns we see for some of the others in the past 12 mths. Yet the index is about 175% higher from its lows back in 2009.
The 2 main factors I would consider before investing in SReits would be the trend of the risk free rate which is our 10 year government bond yield as well as price buffers allowed for asset devaluation.
SReits score well with 33% gearing (debt/assets) and low price to book ratio of 1.02. The Singapore Real Estate index is one up on the Reits with their 29% gearing and price to book at 0.9. Thus SReits would be able to weather a substantial asset price collapse before turning negative.
Thus the main consideration would be if dividends look attractive enough compared to bond yields and my take is as follows.
- SReits have weathered as a hybrid security, caught between equities and bonds
- SReits are affected by the real estate market malaise that is a result of government intervention
- SReits returns are pretty consistent with some of the junk (non investment grade) bonds that are hitting the street
- Junk bond spreads are at or near historic lows and are pricier than stocks http://www.bloomberg.com/news/2014-05-06/junk-bonds-pricier-than-stocks-mean-high-yield-getting-expensive.html
When I read news that a burrito chain in London managed to crowd fund a bond issue that pays 8% dividend for 4 years without much due diligence required (ie. no properly prepared docs such as an Info Memo), I feel that the chase for yields can only come to a dreadful end.
Retail investors appear to have come to a conclusion that bonds, no matter what type, are the safest asset class. That belief is a fallacy.
Some of the junk papers these days are issued with loose covenants and fine prints that are ignored. http://www.bloomberg.com/news/2014-05-23/bond-buyers-skip-fine-print-as-low-rates-sow-complacency.html
The rise of payment in kind (PIK) notes where interest is paid for with more bonds, is a dangerous trend and only supported because investors pay their fund managers to buy such things in the name of returns. Ordinary investors do not typically buy PIK notes.
Reits are safer than many bonds out there issued by companies leveraged to their hilts. For instance, there is not a single SReit that is close to say, Oxley Holdings’ Debt/Asset ratio of 59% and financial leverage of 11 times.
Unlike Business Trusts and corporates, SReits have an obligation to pay out dividends (90%) and keep their loans under 60% of their asset valuations.
Another good reason would be the absence of loss sharing as the new Tier 1 and Tier 2 bonds subject their buyers to.
And finally, Reits is a universal investor asset class, traded in an exchange for all lot sizes, prices and not restricted to just “accredited investors” who are hostage to an OTC market.
I cannot say this is the best time to jump in and invest in SReits although it will make my friend who is long very happy indeed. For the market will be shaky in the months ahead, although I am fond of the industrial and logistics segment.
But I can say, before you jump into the next corporate bond your banker calls you about at some miserly yield, you can take a look at my list below.
Nb : The highlighted rows are not SReits. They are business trusts.