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REITS – Still Good Investments For 2014

The big selloff in real estate investment trusts (REITs) on 22nd May 2013 arising from fears of an increase in interest rates have made a U-turn this year. In fact, Singapore REITs have quietly been outperforming the STI index again in the first 7 months of this year.

The best performers year-to-date for the first 7 months this year was surprise, surprise - REITs with foreign retail assets - CapitaRetail China up 28.20% and Fortune Reit at 20.13%.  The Top-10 Best Performing REITs chalked up an average return of 15.55% (non-inclusive of DPUs payout), far outperforming the FTSTI performance.  Sector-wise, the Office REITs took top spot with an average return of 10%.

TOP 10 PERFORMING 2Q14 Share Px Share Price Forward DPU Change %
REITS JAN-JUL2014 DPU 2/1/2014 31/07/2014 DPU Yield% Change
CapitaRetail China 2.59 $1.33 $1.71 10.36 6.08% $0.38 28.20%
Fortune Reit 20.88 $6.11 $7.34 41.76 5.69% $1.23 20.13%
Mapletree Comm Trust 1.95 $1.19 $1.40 7.8 5.57% $0.21 17.65%
Suntec Reit 2.266 $1.54 $1.79 9.064 5.06% $0.26 16.61%
First Reit 2 $1.06 $1.22 8 6.56% $0.16 15.09%
Capitacommercial Trust 2.18 $1.45 $1.67 8.72 5.24% $0.22 14.83%
Mapletree Logistics Trust 1.89 $1.04 $1.18 7.56 6.43% $0.14 12.98%
Frasers Commercial Trust 2.19 $1.28 $1.41 8.76 6.24% $0.13 10.20%
Mapletree Greater China 1.56 $0.84 $0.92 6.24 6.78% $0.09 10.18%
Frasers Centrepoint Trust 3.022 $1.77 $1.94 12.088 6.23% $0.17 9.60%
AVERAGE 15.55%

So what happened to the notion that higher interest rates are bad for REIT valuations?

Now most analysts and fund managers are scouring the sector once more for investment opportunities.  In this respect, we recently saw the listings of Fraser Hospitality Trust and IReit, the first Pan-European REIT to list in Singapore.

The sell off in REITS last year was another great buying opportunity that I highlighted in this monthly column.  To me, the smart investor should always be aware of market misconceptions about REITS and take advantage of it.

One common misconception is that rising interest rates would automatically be bad for REITS as they increase their cost of funding.  Actually this is like saying that all swans are white.

Rising interest rates affect all asset classes.  For REITs, if interest rates are rising due to better economic conditions, it is clear that they have the ability to increase better rentals and enjoy better rental growth, thus not necessarily bad for REITs.  The key is understanding which REIT stand to outshine the rest in this respect compared to the higher  interest rate burden.

Interest rates increases are part of a typical economic cycle and should be embraced by the smart investors in their strategic and tactical portfolio positioning.  In fact, when I studied the interest rates increase impact on the oldest REIT market - the US REITs from 1972 after the Vietnam War, it was evident to me that in the 22 times in which interest rates had moved up, the impact on US REITs delivering positive returns was 80%!  In fact, the average return was a very respectable 6%.   

To me, REITs are one of the most transparent investment vehicles as they are mandated to pay a minimum of 90% of  their distributable income to REIT holders to avoid corporate tax.  This means that if a good acquisition comes along, they would have to come to the market and explain clearly why they wanted the acquisition.  Failing which, the acquisition may have to be called off.

Over the past decade, I am heartened to see more REITs doing away with “income support” and “yield stabilization” programs.  These are financial engineering used by REIT managers to justify an acquisition where a portion of the price paid for a property is returned by the vendor over a period of the few years, most commonly 5 years.  This artificially lifts the yield of the acquired property in the short term, thereby making the acquisition immediately yield-accretive.  However, the smart investor should understand that if the underlying rents do not rise sufficiently during the “income support” period , the income from the property can fall once the support plan ends, thereby dragging down the overall DPU in the future.  This happened with Capitacommercial Trust’s One George Street.  It was only after the latter had been completed that Capitacommercial finally started to outperform - up 14.83% so far Jan - July 2014.

Thus, REITs are indeed one investment class that one should master their skills set to continue to outperform the market.

Gabriel Yap
Gabriel Yap

Mr Gabriel Yap,CFA was an eminent stockbroker who retired from stockbroking in 2009 to devote himself to philanthropy to help the needy, poor and handicap globally. He has donated and assisted Charities Aid Foundation, Australia (CAF), a not-for-profit donor funds management business. CAF has granted over A$100 million in the past decade to needy organisations to undertake aid and charity work across the world.

Mr Yap is also Executive Chairman of GCP Global Pte Ltd, an investment firm that invest in both direct capital markets, bonds, real estate, commodities, foreign exchange and builds businesses. Mr Yap appears regularly for the TV media like Channel News Asia and Bloomberg and radio channels like FM93.8 for their various investment programs.

Previously Mr Yap has also lectured at renowned government institutions like the SEASEN Course for the Monetary Authority of Singapore and at AsianDevelopment Bank. Mr Yap has also lectured at financial institutions like the Stock Exchange of Singapore, Institute of Banking and Finance, the Institute of Certified Public Accountants, the Singapore Institute of Management and the Securities Investors Association of Singapore.

In 2010, the venerable Reader's Digest magazine created the Money Savvy column in their magazine, helmed by Mr Yap who writes on all things finance and answers questions from the magazine's subscribers.

Mr Yap presently splits his time between Melbourne, Hong Kong/China and Singapore.