Investment Moats

Which Singapore REIT will Survive and Thrive Better During this Challenging Period?

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DBS has a pretty good report out which shows some of the “stress-test” they put the REITs listed in Singapore through.

For those serious in investing in REITs, this is a good blueprint how you can assess the defensiveness of REITs in times of stress.

This kind of assessment is very quantitative and should not be the only way you assess the REIT’s defensiveness. You have to layer the qualitative aspect as well.

Let me share some of the main takeaways.

The Metrics that DBS uses to Measure Whether Each Singapore REITs Will Survive Better

Firstly, we have to be clear what they mean when they measure the survivability of the REITs.

I do not get a clear statement from the report but after reviewing the report, a REIT survives better by coming through this testy period in a much better condition than before they enter it.

  1. They have enough cash flows after paying all the necessary expenses so that they do not need an additional external capital injection
  2. When their assets are re-valued downwards, their overall debt to the asset is still within the MAS gearing limit (now it is at 50%)
  3. The lower amount of debt that needs refinancing in the short term
  4. Able to sustain the dividends better
  5. Most importantly, investors have less risk that they will need to inject equity capital by way of rights issue into the REIT, to shore up capital when no one wants to loan them money they really need

These are more fundamental measures and less about the stock price. However, stock price tends to reflect over time the health of the REIT.

Key Metrics Show the Singapore REIT Sector is in a Better Shape Than the Previous Downturn

The Singapore REIT Sector Health

DBS compares current REIT sector industry metrics against the 4 years before and after the Great Financial Crisis (GFC) from 2007 to 2010.

DBS noticed that during the GFC:

  1. Interest coverage ratio remain stable at greater than 4.0 times
  2. There are more stress on the balance sheet
  3. Asset valuation decline by 2% to 15%
  4. Office sector was the most hard hit

Currently, the overall sector is in a much better position:

  1. The gearing level was similar to 2007
  2. Interest rate today is much lower
  3. REIT sector enter this challenging period with a lower portfolio encumbrance (this means that the amount of debt secured against their properties is lesser. That means they have more properties unsecured to collatorised during refinancing shoudl they need it. Financing companies find you less risky if the debt is secured with properties. In the event the REIT defaults, they can possess the property)
  4. With the recent changes to the MAS leverage limits from 45% to 50%, this provides greater flexibility for the REIT to manage their capital structure in times of financial stress

Personally, when I reviewed DBS’s data, it does not give me the idea that current situation is much different from the previous years they compared against.

If we are in a bad shape back then, the data does show that we are in a bad shape now. Vice-versa.

The only takeaway is that this may be reflective of the overall health of the larger REITs. These larger REITs will shape the table above. It seems to tell me things are not so different for the larger REITs compared to back then.

DBS’s Framework for Stress Testing the REITs

DBS decided to put our REITs through some stress tests.

These are their parameters:

The criteria of evaluation in this Singapore REIT's stress test
The criteria of evaluation in this Singapore REIT’s stress test

DBS look at

  1. potential asset devaluations on gearing level
  2. lower cash flow on interest coverage ratios (ICR)
  3. whether a REIT will breach DBS’s more conservative leverage threshold of 40% after their property devalues 15%
  4. trading below revised NAV (assuming that the REIT needs to be re-capitalized with a rights issue)

And the results is below:

So the more green ticks each REIT have, the better they will emerge oiut of this.

We can see some with 4 to 6 ticks:

  1. SPH REIT (6)
  2. Capitaland Mall Trust (5)
  3. Lendlease Global (4)
  4. Mapletree Commercial Trust (4)
  5. Ascott REIT (5)
  6. Ascendas India Trust (5)
  7. Mapletree Industrial (5)
  8. Keppel DC (5)
  9. Prime REIT (6)

Then there are some REITs that have 1 tick or less:

  1. Suntec REIT (1)
  2. ARA LOGOS (1)
  3. ESR REIT (1)
  4. EC World (1)
  5. Manulife US REIT (1)

1. Which Singapore REIT have a More Conservative Capital Structure?

A lower gearing limit:

  1. Gives financial flexibility to tap debt capital markets if needed
  2. Cost of funds is cheaper
  3. Ability to leverage up to acquire distressed assets

2. The Interest Coverage Ratio Test

The interest coverage ratio test is one that I appreciate less because…. I omit a situation where a REIT, with a diversified tenant base… can suddenly have no income…

DBS stress test the REITs by cutting the REIT’s EBIT by 50% and 75%. What DBS got is a “cash-backed ICR”

They assume that every quarter of delay in collections will lower the EBIT by 25% . In the even of a 6-month and 9-month delay, this will reduce the EBIT by 50% (unlikely) and 75% (highly unlikely).

In this higher stressed scenario, the ICR range is reduced to 1.1 times to 7.9 times. With a 9-month delay, some ICR can go below 1 times.

This stress test is good, but in reality it is very broad stroke. Some type of REITs such as office should be less affected such that their EBIT broadly falls by 50% and 75%.

So you do have to be a bit qualitiative about it.

Out of the troubled hospitality and retail REITs, SPH REIT and Lendlease looked particular strong despite this very stressful test.

3. Which Singapore REIT is More Sensitivity to Decline in Valuations

While the REIT managers did not give clear indications, history tells us that it is likely the REITs will face a decline in valuations.

DBS tested the REITs gearing levels to a 5%, 10% and 15% drop in valuations.

All S-REITs did not breach the 50% gearing limit set by MAS. However, if we use DBS’s more conservative 45% threshold the following REIT would touch the limit first:

  1. OUE Commercial
  2. Suntec
  3. Far East Hospitality REIT
  4. ARA LOGOS
  5. ESR REIT
  6. Mapletree Logistic Trust
  7. Soilbuild Business
  8. EC World

4. Which Singapore REIT can Sustain the Dividends with the Help of Short-Term Debt?

DBS stress test the REITs ability to sustain the dividends by temporary take on debt. This would corelate to the REIT’s individual debt levels and gearing limits:

The Singapore REITs could maintain the dividends, but some of the REITs will break a 40% gearing level.

5. Which Singapore REIT Trades Below NAV Even After Potential Decline in Value?

Since DBS stress-tested the Singapore REITs with lower valuation, they also presented the data in terms of attractiveness in terms of valuations.

One of the risk in investing is to use historical data and come to a conclusion that this stock is cheap. The right way to do is to do what DBS did, which is assume a discount in value that may happen and see which one still look attractive:

Those that are highlighted in green are the REITs that, after a decline in portfolio value, still has a net asset value (NAV) per unit higher than current REIT unit price. This indicates even after both price decline and NAV decline, the REIT looks attractive.

On a NAV basis, DBS believes that many REITs are trading at an implied 15% decline in portfolio valuation.

Capitaland Mall, Starhill, and Lendlease are trading at a greater than implied 15% decline in portfolio valuation.

6. Singapore REIT Re-capitalization Risks When Property Value Declines

When the REIT portfolio decline in value, the gearing level increases.

Some REIT might potentially need to raise capital via rights issues, placements.

This will dilute and reduce your dividends because you are not buying properties with this capital but the number of shareholders increases to share the same pot of rental earnings.

DBS stress test this by simulating:

  1. the REIT does an equity fund raising if gearing goes above 40%
  2. the rights issue is priced at a 25% discount to current trading price

The REIT highlighted in green are the REITs that after a 15% decline in portfolio value, they did a necessary rights issue, and their NAV per unit is still higher than current share price.

Based on DBS’s assumptions, 50% of Singapore REITs in their coverage will not require any equity fund raising even if property valuations fall by 10%.

If property valuations drop by 15%, those that need to recapitalize will see their NAV per unit drop by 23% to 34%.

10 of them are trading at prices that are even below the revised NAV. They are mainly in the retail and hospitality sector.

The table above shows the potential effects of the equity raising dilution on dividend yield. With the rights issue, the DPU should be diluted.

However, even after that decline scenario, some REITs are still trading with a dividend yield that is higher than their 10-year historial average yield.

Those are highlighted in green.

On average, the dilution on DPU Yield is about 1% – 2%.

The Singapore REITs that potentially will experience the largest declines in DPU Yields are:

  1. ARA LOGOS (1.3% decline)
  2. ESR REIT (1.3% decline)
  3. Soilbuild Business (1.1% decline)

For some, even after this decline, the REIT is still traded at attractive yield.

Last Word

I feel that DBS tried its best to provide some rational negative operation assumptions.

They did a lot of hard work there and we got to thank them for that.

In this whole exercise DBS is trying to help us assess, based on current price, what are some of the scary stuff that may have been priced in.

It is to help us see in the spectrum of very undervalued to very overvalued, where each REIT is right now.

However, I believe the markets and fundamentals are rather fluid here as well. When the property value actually goes down, the share price might react very negatively, forward pricing in a potential rights issue.

If it looks attractive today, when the event happens, it might look even more attractive.

Of course, if these valuation declines do not happen, then you missed the boat.

Some investors will look towards this for attractive mis-pricing. Others will use this as a way to assess their Singapore REIT on the risk spectrum better.

Let me know which REIT caught your eye or some realization you have after this review.

I have a FREE REIT Training Center. The link is below.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. 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
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

High Yield Dividend Stocks Yield Just Got Even Higher

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How? When their stock prices got ever lower.

I decided to take some time to check through the Dividend Stock Tracker to make sure the numbers look correct.

Click to view a larger table.

Think the new readers did not know much about this but prices are updated at the end of the day. You can have a good, quick glance on the dividend yield, debt leverage and valuations for the high yield dividend stock(s). Just bookmark the dividend stock tracker page.

Prices look as depressing as my mood. It feels that there could be a few reasons why it was beaten down so much, chief among them is funds and institutional investors selling and exiting in a wide-scale manner.

I think with the lockdown, the majority of these companies are not going to look good. Vacancies will rise, rental reversion stagnates, but valuations may also get more compelling in this phase.

The prices reflect uncertainty. Due to that, likely the compensation from equity will be higher.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. 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
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

Singapore Savings Bonds SSB April 2020 Issue Yields 1.63% for 10 Year and 1.46% for 1 Year

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Here is a higher yielding, safe way to save your money that you have no idea when you will need to use it, or your emergency fund.

The 10-yr and 1-yr Singapore Savings Bonds Rate since the first issue in Oct 2015

The March 2020’s SSB bonds yield an interest rate of 1.63%/yr for the next 10 years. You can apply through ATM or Internet Banking via the three banks (UOB,OCBC, DBS)

However, if you only hold the SSB bonds for 1 year, with 2 semi-annual payments, your interest rate is 1.46%/yr.

$10,000 will grow to $11,634 in 10 years.

This bond is backed by the Singapore Government and its available to Singaporeans.

A single person can own not more than SG$200,000 worth of Singapore Savings Bonds. You can also use your Supplementary Retirement Scheme (SRS) account to purchase.

You can find out more information about the SSB here.

Note that every month, there will be a new issue you can subscribe to via ATM. The 1 to 10-year yield you will get will differ from this month’s ladder as shown above.

Last month’s bond yields 1.71%/yr for 10 years and 1.43%/yr for 1 year.

Here is the current historical SSB 10 Year Yield Curve with the 1 Year Yield Curve since Oct 2015 when SSB was started (Click on the chart, move over the line to see the actual yield for that month):

The Application and Redemption Schedule

You will apply for the bonds through the month. At the end of the month, you will know how much of the bond you applied was successful.

Here is the schedule for application and redemption if you wish to sell:

Click to see larger schedule

You have 02 to about 25th of the month (technically the 4th day from the last working day of the month) to apply or decide to redeem the SSB that you wish to redeem.

Your bond will be in your CDP on the 1st of the next month. You will see your cash in your bank account linked to your CDP account on the 1st of next month.

How does the Singapore Savings Bonds Compare versus SGS Bonds versus Singapore Treasury Bills?

Singapore savings bonds is like a “unit trust” or a “fund” of SGS Bonds.

But what is the difference between you buying SGS Bonds and its sister the T-Bills directly?

Both the SGS Bonds and T-Bills are also issued by the Government and are AAA rated.

Here is an MAS detailed comparison of the three:

SGS Bonds versus Singapore T-bills versus Singapore Savings Bonds
Click to see bigger comparison table

What is this Singapore Savings Bonds? Read my past write-ups:

  1. This Singapore Savings Bonds: Liquidity, Higher Returns and Government Backing. Dream?
  2. More details of the Singapore Savings Bond. Looks like my Emergency Funds now
  3. Singapore Savings Bonds Max Holding Limit is $200,000 for now. Apply via DBS, OCBC, UOB ATM
  4. Singapore Savings Bonds’ Inflation Protection Abilities
  5. Some instructions on how to apply for the Singapore Savings Bonds

Past Issues of SSB and their Rates:

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. 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
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

The Affluent of Singapore: Rich but not Rich Enough

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There is this report in the Straits Times talking about half of the affluent in Singapore may not be hitting their retirement goals.

This sounds very short of details, but the actual report is quite interesting.

The news article talks about a Standard Chartered Wealth Expectancy survey done on 10,000 individuals around a few countries. Let us just say that we are not the only one falling short. So it is less of a Singapore problem.

The report sort of concludes that we may have too much in savings and equivalents. We may not be diversified enough and are not able to reap a higher return expectation due to our high cash and high property asset allocation.

Standard Chartered’s methodology is rather interesting.

How Wealth Expectancy is Derived

The report is made up of both opinion and economic modeling. This means that qualitative answers were asked but also they were able to tap their client database to form a better picture of the various segments they are reporting on.

They target 1000 wealth creators each in 10 different countries to form this survey.

The report assesses a few metrics that we have seldom heard of. They are based on Standard Chartered’s proprietary model.

The 3 groups are:

  1. Emerging Affluent. These should be similar to the HENRYs, who have good income and are banking with Standard Chartered but net worth wise, they are not there yet
  2. Affluent. Amongst the top decile of their earned income in their countries and with USD1 million under management
  3. High Net Worth Individuals (HNWIs). Similar to the Affluent, these group of people have AUM of USD$1 million and above. The difference is that this group may not have the income

If you look at the salary gauge of Singapore, this report seems to be talking about individuals. The emerging affluent are the people that have an income that ranges from SGD5000 to 10631. These should be above the 50 decile to 80 decile of Singapore individual income.

Their definition of affluent are those that earn in the top decile of Singapore.

Next, what is Wealth Expectancy?

In the previous slide, they define wealth expectancy to be the highest total wealth you will reach in your lifetime. This is likely to be based on your income, growth of your income, your savings rate, the rate of return you will get, what is the total wealth you could achieve.

The peak that they used universally is 60 years old. This is the average start of retirement age for all countries.

Standard Chartered separates consumable wealth from normal wealth. Not all of your wealth can be consumed. They then divide this consumable wealth by 12 to get the monthly consumable wealth.

This is then measured against their wealth aspiration, which is the amount of wealth they need to live comfortably in retirement. They derive the wealth gap from there.

The rough formula to derive the monthly consumable wealth expectancy is shown above.

They probably derive what you earned from your human capital up to 60 years, deduct away 80% of your residential property value, add in your CPF pension amount.

It is pretty good that they show that not all your residential or investment property can be turned into cash flow.

Then they divide this sum by the number of months based on your life expectancy. If your life expectancy is longer, the monthly amount is smaller.

Based on what I see, this methodology does not overcomplicate things too much and the consumable wealth that you can spend is likely not inflation-adjusted.

How did the Richer Singaporeans Do?

Click to view larger image

Singapore and Hong Kong have the highest average wealth expectancy. This means that by 60, you have the potential to build up a lot of wealth.

US$2.4 million is the average and here is the break down:

  1. Emerging Affluent: US$622,000
  2. Affluent: US$1.9 million
  3. HNWIs: US$4.6 million

We have a long life expectancy at 31 years, but our wealth-income would only provide us for between 16 to 19 years.

One problem is that our aspiration wealth is pretty close to our current income.

For example, the emerging affluent think they need US$5.1k, which is slightly higher than their current income of US$4.8k.

However, based on Standard Chartered’s projection, they might only be able to have US$3.3k in monthly consumable wealth.

I take note that the affluent want US$13k but likely will have US$6k and the HNWIs need US$22.7k but they only have US$10.7k.

Almost all these numbers are very high to Kyith.

I think richer Singaporeans are doing better than their peers in other countries in that they are quite close to their aspiration. But the majority are far from where they want to be.

For the rich, their children’s education is of the utmost importance. This is followed by retirement and investment property.

It is so very strange that we have a separate category for Investment Property. The first 2 are life goals, investment property feels like an aspirational goal.

The problem is that the favored wealth-building financial asset happens to be overwhelmingly savings account. This is followed by property investment and time/fixed deposit. Fixed deposits are pretty close to savings and if we look at this as a whole, overwhelmingly it seems a lot of people’s money in Standard Chartered is not investments but their savings account!

They do not know the Best Wealth Transfer Approach

There were some interesting data points brought up as well.

Wealth transfer is a big thing and will become a bigger thing in the future. About 63% of wealth creators have a wealth transfer strategy in place.

This is higher than the 45-50% average for Asia that I came across previously.

However, nearly 47% do not feel the best approach to take.

55% of them want their bank to do more to help them.

Emerging Affluent of Singapore is More Concerned About Retirement but Really likes Savings Products

Saving for retirement is a top financial goal for 2/5 of the emerging affluent (42%).

This is more than any other markets. This is double that of the HNWIs and Affluent.

Perhaps they are surveyed at a different stage of their lives. The HNWI might already have more assets and thus they have higher priorities than retirement.

The divergence here is that the emerging affluent tends to focus on savings products while the HNWIs and affluent are more open to advanced products.

Compared to other markets, they prefer savings accounts and less of real estate investment trusts (REITs). This is a strange result, considering we have such a big REIT market here.

They use fewer digital wealth management tools than the affluent and HNWI.

In the slide above, you will notice that the wealth aspiration becomes smaller if they are very far from where they want to be. Reality set in when we realize we are so far from where we wish.

In terms of adequacy, China affluent is the most power. Their consumable monthly wealth is so close to their aspirations.

For the HNWI, they have so much more than their life expectancy! Interesting is that instead of investment property, a large part of their wealth building is from fixed income investments.

My Own Takeaways

Here are some conclusions that are relevant to me.

  1. Consider the top decile to be the affluent. The 50 to 80 decile may get there but most will likely stagnate in their income after a while
  2. These are people with at least 1 million in AUM. Not investible assets. Likely their net wealth is much higher than this.
  3. We should note the current income and the income aspiration they are looking for.
  4. What people think they need is close to what they have now. The “End of History” Illusion is very strong it seems. Probably only the affluent show some deviation from this trend.
  5. The emerging affluent have a US$622,000 or SG$840,000 wealth potential. That is probably as close to what local university degree graduates can get. What would you do if you have this amount today?
  6. Almost all groups have a high preference for safe assets. This means that most likely, either they do well in their career or their business. If not they will not meet their retirement aspirations.
  7. If their database show so much cash, it means even the banks have a problem converting their clients to higher risk instruments.

To build wealth towards your retirement aspirations, you need a certain rate of return. Your rate of return depends on your overall asset allocation. If your overall allocation is at a low rate of return financial asset, then that is all you gonna get.

Very far from your goals.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. 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
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works