I thought its good to do a quick recap to see where we are currently when it comes to the REITs scene. Last year, there the main narrative was the rising interest rate making REITs less attractive as an investment to be in.
What we observe is that despite the rising rates, Singapore based REITs, particularly those with strong sponsors held up rather well.
There could be two reasons ( I say could because we are never very sure) one is the strength of our currency and that these REITs are known in the region among the institution to be good quality. These two reasons probably make these REITs with Singapore based assets defensive in hindsight.
Those that hold foreign assets, or denominated in foreign currency, had some wild volatility. For those holding on, such as myself, it doesn’t behave like the kind of assets you think it should be behaving.
Back then my thinking was, interest rates tend to be volatile, its just whether its a secular trend heading upwards or that there would be more volatile gyrations. I lean towards that the scenario that there will be some point where the interest rate will take a breather.
Even then, we are not sure how the REITs will react.
Even before the Fed pause the rates, the REITs have recovered. Some of them going up as much as 15%.
And we got to the point where we will say, they are now overvalued. Or are they?
The chart above shows the Lion Philip S-REIT ETF, which is a Singapore REIT focus ETF listed on the SGX. I was checking out the price, and decide to layer it with one large market cap REIT in Capitaland Commercial Trust.
You realize the price movement are pretty similar. The magnitude is different though. I got a feeling you could get an ETF exposure with the top 5 market cap REITs in Singapore. Or you can do it the other way.
As you look at the chart, you might have different philosophical thoughts.
What goes through my head is that, hey, even as an ETF, it is volatile, but within this volatility its +8% or -5%. The volatility of the ETF is smaller than holding a lot of individual stocks. Unless there is a credit cycle turn (which could really affect the fundamentals of the REITs), you will get this kind of gyrations and earning 4.8-5.2% per year.
By not doing much.
You just hope that the outlook for these property assets are upwards instead of downwards. Those who judge the REIT ETF over a 1 year period, probably are looking at things the wrong way.
There are comments as to the dividend yield probably closer to 4%, but my friend Turtle Investor have highlight on his blog that the management might be moving into a new semi annual payment schedule. If we pro rate the dividend paid out, I think it should come up to 4.8% based on the IPO price.
How is the valuation of the sector now?
I came across this DBS Chief Investment Office article where they think the Singapore REITs and Asian Dividend Stocks add to portfolio resilience.
I tend to be a little skeptical about this because given what kind of stocks, REITs are still stocks, Asian Dividend Stocks are still stocks, there is a likelihood when times are worse, their correlations become rather close to one another.
However, they have a latest historical REIT dividend yield spread over 10 year Singapore Government Bonds chart.
That has always been my favorite to see where we are in terms of valuation.
This is dated 8th Feb so its rather recent. And if I can next time I would share this once in a while. We observe the yield spread over the 10 year Singapore government bond yield (red line) to be turning up, which indicates a widening. An increase of yield spread above 4% usually indicates that the REIT sector leans closer to less overvalued.
The REIT’s dividend per unit rose but the price of the REITs rose more, so the dividend yield should have gone down. What caused this rise is that the government bond yields have came down more, and this is the net effect.
It is quite difficult to judge whether we are closer to the mean or away, so I added this Kim Eng one which is slightly 1 month older:
This one only goes back to 2008 so the average and +1 standard deviation and -1 standard deviation is taken over this slightly shorter period. we can observe if it is 6.2% it is slightly closer to the bottom of the average. So largely we are not cheap not expensive. You can also see the yellow line dip as well.
I think what makes investing hard is that things are not always definite. If the 10 year rate can dip so easily, it can go up pretty easily as well.
One thing to note is that, you would observe that price movement usually happens before the fundamentals. That is to say, when we realize that rising rates is less of a problem, the prices have more or less ran up enough.
The biggest reward sometimes always involves taking a bet on some fundamental direction.
You won’t get the situation where cost is clear, everything safe, then the share price run up nicely for you. Usually, prices precede the fundamental situation.
If we look at the Price to Book (PTB) of the REITs on my Dividend Stock Tracker, most are not overly expensive. Those that trade above 1 are the Strong Sponsor higher quality one. There is seldom a mis-pricing. If you think its high quality, others also think so, and so the price takes into consideration that better quality.
Ok back to the DBS CIO report.
One chart that caught my attention is this CBOE SPX volatility index versus the S REIT to global equities. I am not sure if this is some form of curve fitting but its fascinating how correlated these are. It seems to say when the volatility picks up, S REIT, relative to global equities do better.
There are some things that made me gloss over this. At the start in Jan 2018, we see the disparity in the relationship they talked about. Secondly, this relationship is concluded over 1 year, which is a shorter time period to confidently conclude such a relationship exist.
In any case, the CIO recommends a barbell strategy, which is both defensive and offensive at the same time. This kind of stuff is a little way over my head.
I don’t like running too much of these social media stuff but my friend do have a chat group that focus on REIT discussion. I do pop by once or twice a day to take a look at it, and where I can, I try to post some of these useful analyst reports for the benefit of the group members.
For most of the time, the group is rather quiet.
For more of my articles on REITs you can check out learning about REITs in the link below.
Do Like Me on Facebook. I share some tidbits that is not on the blog post there often.
Here are My Topical Resources on:
- Building Your Wealth Foundation – You know this baseline, your long term wealth should be pretty well managed
- Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
- Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
- Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
- Free Stock Portfolio Tracking Google Sheets that many love
- Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free