The REITs symposium held on June 4th was one to remember, with a panel of distinguished speakers. The various speakers shared many insights into the REITs industry and reinforced why they believed S-REITS to be an important asset class.
Here are 10 key takeaways I got from the event as well as the invaluable advice shared by the speakers.
1. Focus on distributions per unit, not the current share price
David Kuo, CEO of Motley Fool Singapore, emphasized that oftentimes, investors who buy into REITs start to panic when the share price falls below their buy-in price. However, he emphasized that investors should focus instead on distributions per unit (DPU) because, ultimately, an investor buys a REIT for income and the most important thing is the distribution yield on cost (the price when the investor first purchased the stock). Hence, it doesn’t matter how the share price fluctuates because it doesn’t generally affect the income investor. Our dividend yield on cost is not affected by the current share price but rather by the distribution per unit each year. This is a common misconception observed by Kuo among many novice investors and he feels investors should not let share prices affect our emotions and focus on the distributions instead.
2. Cooking rice analogy
This was an interesting analogy brought up by Kuo. Investing in REITS (and stocks) from a fundamental standpoint is similar to cooking rice. The best way to cook rice is to leave the rice in the rice cooker and let it simmer until it’s done, opening the lid only when it’s ready to be served. A person who has little experience in cooking rice will keep opening the lid while the rice is still being cooked to check if it’s done. This will however, affect the texture of the rice as well as increase the time taken to cook the rice. Similarly, it is important that investors do our homework when researching a REIT and not be affected by short and mid-term fluctuations and instead leave the REIT to “simmer” and give us our desired returns through dividends.
3. Fish ball noodle analogy
Another one I particularly enjoyed by Kuo. When we buy a bowl of fish ball noodles for $3.50 and get six fish balls instead of the usual three, we will feel very satisfied because we know it’s a good deal for the price we paid. However, when the person behind us in the queue pays $3.50 but gets eight fish balls instead of the six you have, it is natural for all of us to feel unhappy that their $3.50 got them a better meal than ours. Kuo emphasized that the right mindset to have is not to worry so much about the price other investors get in it but instead focus on whether you’re happy with your investment at the share price and dividend yield you secured. Ultimately, if you are happy with a 6% dividend yield, you should not be crestfallen if the share price drops and people managed to get an 8% yield. It is this “emotional warfare” that hinders many investors as they often try to catch a stock at the bottom and miss out on many opportunities because of that.
4. Know the story behind the REIT
Although market sentiment might not be good right now (especially for the hospitality, retail, and office sectors), always look at REITs through the perspective of a long-term investor. Will there still be shopping malls, hospitals, and offices 10 years from now? Is the current market sentiment justified for REITS to trade at such low prices? Always understand the outlook for the sector you invest in and have a long-term investor’s point of view rather than one of a speculator’s.
5. The importance of good management
I shall use the example raised by Chong Kee Hiong, CEO and Executive Director of OUE Hospitality Trust. OUE Hospitality Trust’s DPU fell in 1Q 2016 due to a drop in revenue from its retail mall, Mandarin Gallery, and a share dilution when they issued rights for the funding of the extension of Crowne Plaza Changi Airport.
Chong shared how the REIT is planning to change the way the mall is run in order to adapt with the changing retail environment. With the rise of ecommerce and suburban malls, OUE Hospitality trust is focusing on making Mandarin Gallery a lifestyle mall with flagship stores that are unique from the other standard malls. They plan to increase popularity and human traffic in the mall by using vacant spaces to create events such as the recent Silent Yoga event to attract shoppers and potential tenants when they can observe human traffic for their niche market segment. Additionally, the REIT has brought in stronger tenants on longer leases such as Michael Kors and Victoria’s Secret who both signed a 10-year lease. This is a strategic move done by the management to ensure that the mall can tide over this challenging period for the retail sector and maintain distribution for shareholders.
6. There is no free lunch on earth
Oftentimes, income investors tend to chase dividend yields and make their decisions based on REITs that pay the highest yields. However, investors must be wary as the yields are higher for a very simple reason – the risk attached to it.
For example, hospitality and industrial REITs generally tend to have higher dividend yields compared to healthcare REITs. Occupancy rates fluctuate a lot more for hotel rooms and rates differ from month to month, causing RevPAR to change and making distribution payout less stable. Industrial REITS have many properties with a short land lease and occupancy rates can go as low as 60% for certain properties during bad times or when the lease of a property is close to expiry and they are unable to find tenants willing to commit for a short tenure. On the other hand, healthcare REITs’ distributions are more stable and they have longer leases signed with tenants. Healthcare also tends to have very stable growth regardless of the economy. As such, investors need to understand that higher dividend yield is usually associated with higher risk and should be clear that they’re satisfied with the yield based on the REIT’s risk profile and their individual risk appetite.
7. What type of returns can investors expect from REITs?
This was the first question asked by the host to the panel during the first panel discussion. Alvin Loo, Director (Group Business Development) of ARA Management remarked that the entire REITs sector has an average yield of 6.9%, with a total return (dividend yield + capital growth) of about 10% per year – this makes it an extremely valuable asset class to include in your portfolio for something of reasonably low risk. Additionally, there is a wealth of information available out there due to the transparency of the REITs sector in Singapore. As such, investors can make more informed decisions before investing into any REIT. Lastly, you are able to pick the exposure you are comfortable with. For instance, if you believe that suburban malls will be key growth driver in the next few years, you can have a larger position in REITs that own suburban malls and smaller position in other areas.
8. Why are the yields for REITs so high? Is it sustainable?
This was another question asked during the first panel discussion. It was answered by Sonny Tan, CEO of the REITs Association of Singapore (REITAS). He mentioned that the dividend yields of REITs have been consistent over the past five years at an average of 6.5-7% per annum. The reasons for this are:
- Pro-business environment in Singapore where REITs are not taxed on their earnings as long as they pay 90% of their earnings as dividends. This is to encourage the growth of the REITs sector in Singapore which is still maturing.
- REITs can leverage up to 45% of its assets. This will bring growth in DPU as REITs are able to secure loans at a low cost of debt, usually around 2-4% p.a. depending on the type of REIT and location of its properties. 2-4% is a relatively low interest rate and REITs usually earn a much higher property yield between 4-7%. As such, REITs can grow sustainably and continue to pay high dividend yields to investors.
9. What are the downsides to REITs?
Tan mentioned that the downsides really depends on the portfolio spread of the REIT. What type of properties does the REIT own? Where are the properties located and in which countries? For the larger REITs with huge international exposure, there might be higher risk as they are subject to forex exposure as well as the global economy, albeit providing greater diversification and lower concentration of income from a few assets. As such, investors should match their risk appetite with something that suits their needs and pick the REITs they understand and are most comfortable with.
10. Do you think the REIT industry has reached its saturation point?
This was a question raised during the second panel discussion. Derek Tan, Vice-President of DBS Group Research, took the question first by mentioning that the REITs industry is still young with a lot of growth potential. However, we are likely to see more overseas listing in the near future as the Singapore market is quite saturated with less assets to acquire. This was affirmed by Low Chee Wah, CEO of Fraser Commercial Trust, when he said that we can expect to see more of iREIT and BHG REIT which are foreign corporations with foreign assets being listed in the Singapore REITs market. Chang Rui Hua, Head of Investor Relations CapitaLand Limited, mentioned that REITs are likely to see more capital recycling taking place where sponsors sell their properties to their REITs to manage. There might also be new sectors within the REITs industry such as student housing or a logistics-focused sector.
The Fifth’s Perspective
The REITS sector still has lots of room to grow which makes it even more exciting for investors who want to get started investing in this asset class. A parting message shared by the panel of speakers during the second panel discussion was that investors should look at REITs as a stable, less volatile stock rather than a growth stock. They should also moderate their expectations as they cannot expect growth in dividend yield year on year as the REIT managers have to balance growth with stability of distributions. Nevertheless, REITs are still a valuable asset class to have in a balanced portfolio as it gives a high dividend yield of 6-7% with reasonably low risk.