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A S-REIT Price Fall – An Opportunity or the Beginning of the End

If you tune in to my Dividend Stock Tracker on Friday, you would notice that its in a sea of red.

We are seeing some attractive REITs, at prices that we seen prior to Brexit. CMT is at $1.95, Ascendas REIT and Mapletree Industrial REIT both yields 7%, with Mapletree having a very low 26% net debt to asset. Starhill Global is backed down to $0.76.

Mr Donald Trump and his Policies

If we live and breath the Singapore markets, we might be lead to believe that this draw down is due to Donald Trump being elected.

His policies during his campaign does point towards an unfavorable scenario for the REITs and dividend stocks.

Firstly, you need to know that REITs and certain dividend stocks are rather interest rate sensitive:

  1. the REITs are leveraged to a certain extend and changes to the interest rate affects their cost to borrow and the returns
  2. when relatively safe government bond interest are up, to compensate for the additional risks investor take to invest in REITs, yields need to be bigger, and all else being equal, price of REITs will have to go down

The policies that Mr Trump proposed are fiscal in nature, which includes tax cuts so that money can flow back to the USA, to be put into infrastructure program as well as to boost the oil and gas industry.

These plans, if they work, will stimulate growth and inflation, which will mean interest rates should go up.

Mr Trump have said in a few times during his campaign run that he favors a more aggressive rate hike, though in some other commentary, he did show he can live with a low rate environment.

This downtrend have been taking place prior to the USA Presidential Election

This downtrend didn’t just happen after the election win.

In Singapore, the majority of the draw down did take place during and after the election results.

However, REITs in other countries have been in a draw down for some time.

The above chart shows the Vanguard REIT ETF in the USA, since August, the prices have went down 15%.

The above ETF is the newly IPO Phillip SGX APAC DIV ETF. It is heavy in Australian REITs. Since its debut its been down 5-6%. The ETF did not debut at a good time, I’m afraid.

Here are some of the bigger components.

SCentre Group is down 24% since its peak. Its current PTB is 1.23 times and net debt to asset is 33%.

Mirvac Group draw down is 15%. Its PTB is 1.03 times. Its net debt to asset is 22%.

Goodman Group have been selling assets. Their draw down from peak is 18.3%. Current PTB is 1.53 times. Their net debt to asset is 12.30%.

You would notice their net debt to asset is much lower than SG REITs, but have much higher price to book ratio. Such is the nature that that they are able to perform well since the GFC, and have learnt much of their highly leverage lessons since then not to take on debt.

Markets may be forward looking

The interesting thing about markets is that they do have a way of telling us what would happen in the main economy.

The prices now look to factor in higher 10 year government bond yields around the world.

In Singapore the 10 year SGS Bond yield creep up to 2% from below 1.7%.

The higher the low risk SGS Bond creeps up, the less attractive equities, REITs and risky assets are.

This is just one part of the equation. Equities and REITs can get out of this funk if they are in a cycle where business is thriving, rents can be raised organically, profits growth is greater than interest rate.

As investors, you have to ask yourself whether we are in such an environment.

What you should think about

What is on your mind is whether this is a good opportunity to purchase. The market is spooked into thinking the rates will rise, such that the low risk bond yields more than 2%, to the extend of 5-6%. You have got to ask yourself whether such a scenario will take place. Would the policies put in place create the inflationary environment?  How much would rates rise to?

My thought is that the markets is anticipating like 4 rate hikes by the end of Dec 2017 and raising the rates by 2%. Its your guess whether that will take place.

Do note that other countries have little control over what happens in the USA. We are a rate taker. There could always be a scenario where they do well, and the rest of us do not.

Reviewing the Historical Yield Spread

As investors,  you can always attempt to value whether the market is pricing the REITs too cheaply or whether it is fair.

The above charts are taken from Deutsche Bank report on S-REITs in Nov 7. This is probably the period before the local draw down.

The charts show the average REIT dividend yield – the 10 year SGS Bond rate, or the yield spread. If you understand what I explain about REITs being a financial asset in competition with low risk government bonds, this spread will let you know if the REITs on average are relatively dear, fair or cheap.

The spread shown here is above average, which means its slightly undervalued than the 15 year historical.

Do note that, the dividend yield is fluid, and so is the market yield on the SGS Bond rate. The prices of REIT have fallen, which increases the dividend yield, but the yield on the 10 year SGS Bonds have also rose. The spread might still be the same.

If we get a situation where the price fall is much more than the rise in bond yields, value may present itself.

Ensuring the Yield Spread accommodates a Higher Future 10 Year SGS Bond Yield

I was talking to an investor who I think is a rather sharp critical thinker. The conversation leads to Capitaland Mall being a good opportunity but what price would he buy it at?

His reasoning:

  1. What is a future likely baseline 10 Year Bond yield? Perhaps 3%-3.5%
  2. What is the historical yield spread? Around 3%-4.5%
  3. Taking into consideration #1 and #2 the yield needs to be at least 6%-8% on FUTURE cash flow

I would add that certain REITs needs a certain premium due to shorter land leases, currency risks, some other REIT specific risk, and thus the value point would be much higher than the 6-8%

I thought that would be a good way to value your prospective REIT.

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Tuesday 15th of November 2016

sorry if this is abit off track, but can see that there's about 40% of your portfolio in frasers' counters now. if it is possible to sum up what you see are their greatest strengths (and hence attractiveness)?


Sunday 20th of November 2016

Hi Weiz, it is a coincidence that I owned so much of Frasers products. The REITs are either well managed in the past and also some of the new ones showed better potential of them being not-singapore concentrated.

Frasers Commercial is risky. FCL have much debts and risky but also possibly undervalued as well. I do not set my portfolio to be so concentrated, they just become as such.


Monday 14th of November 2016

Just got some CMT at 1.91 this morning, breaking my own rule of "do not buy above NAV". The issue with REITs and rates is complicated because if rates go up, it's likely inflation will too - and inflation will lift rents and NAV.


Tuesday 15th of November 2016

hi Pierre, that rule can sometimes impede you. I think you have to see if the REIt operates in an area that growth is better not the other way round.increase in interest rate will just kill them

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