October 5

How to buy REITs without losing more money

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Nope, you definitely shouldn’t learn from me.

As someone who’s failed time and time again in buying good REITs in Singapore, this article shares all the lessons I’ve learnt from those painful (and expensive) mistakes.

I'm definitely no pro and my poor track record speaks for itself
I’m definitely no pro and my poor track record speaks for itself

My story

I remember the first time I bought a REIT. Reading of all the income one could make from REITs, the idea of being a passive landlord, with just $1000, got me snickering in my chair.

Me, a landlord, owning the most prime estate in Singapore!

Of course I wanted to!

In January 2020, seeing the growth in prices, I promptly bought my first REIT – First REIT, and saw it drop by more than 70% in the first year with the advent of COVID.

Yup, that’s me.

Thinking I had learnt my lesson, in April 2020, following the drop in the markets from COVID, I bought a REIT that looked like it had better fundamentals – IREIT, a REIT that focused on European prime office buildings.

Again, it failed to go nowhere, being flattish for the rest of the year.

This is no article on how I’ve doubled or tripled my money from REITs, but it’s how you can set your expectations right.

Know why you’re buying a REIT

You’re buying a REIT, that’s linked to physical real estate. That’s multi-ton building that can’t be moved easily. As much as people talk about how REITs are great because of how they are backed by physical assets, it also means that transactions may come slower.

You’re not buying a REIT for a quick doubling of your money. For the most part, REITs offer a steady growth in dividends and stock price growth.

They wouldn’t offer the outrageous growth you see in Amazon.com.

If you’re buying a REIT, you’re buying it for:

  1. Steady income
  2. (Fingers crossed), income growth

Because REITs are required to distribute a certain percentage of their rentals to shareholders, this means that they can’t afford to keep the money in the business, and sell the business on the long term vision, like what Bezos does at Amazon.

They can’t sell you a vision of fancy office buildings down by the beaches, when their office buildings are in boring Tai Seng, an industrial location in Singapore.

They can’t keep all the money in the business, because they are mandated by law to distribute it to shareholders. This means that they can’t suddenly change their business model overnight.

Many REITs found themselves poleaxed with COVID requiring most employees to work from home. Suddenly, all their occupants didn’t come to the office. How do you collect rent if there’s no one coming into the office?

Over the years watching different REITs, here are the qualities which I’ve seen do better than most.

Quality sponsors give better assurances

Here in Singapore, with real estate space being at a premium, the REITs which have done better are the ones with quality sponsors.

These are the ones which have a historic track record of property management, rather than sponsors that have listed on public markets, to get public money, to offload the risk of investment onto the public.

One (bad) example is First REIT. This is one that did very badly with COVID, with their poor balance sheet resulting in them being unable to withstand the lockdown.

They had to issue a highly-dilutive rights issue, just to raise money.

First REIT's 2021 1st half press release, which saw them doing a very dilutive rights issue
First REIT’s 2021 1st half press release, which saw them doing a very dilutive rights issue

The better ones are those backed by quality sponsors, and here in Singapore, those belong to:

  1. Frasers
  2. Mapletree
  3. Capitaland
  4. Keppel
Here you can see the top-ranked REITs in Singapore, shown on Stockopedia, with First REIT being an anomaly.
Here you can see the top-ranked REITs in Singapore, shown on Stockopedia, with First REIT being an anomaly.

New economy REITs tend to do better

With the boom in ecommerce and the digital economy, you know that properties leasing data centres and logistics warehouses will do better.

The likes of Frasers have shifted into these new economy sectors, with key divestments in non-core commercial properties, and investing strongly into the new economy sectors.

If you look at what Frasers' Property is betting on, you will see that they are also looking at the new economy sectors
If you look at what Frasers’ Property is betting on, you will see that they are also looking at the new economy sectors

This has substantially helped them to grow their portfolio, but also their distribution.

If you look at the likes of Mapletree Industrial Trust, their big push into data centres has also seen them grow significantly.

Just see how Mapletree has reshaped their portfolio to capitalise on the data centre need
Just see how Mapletree has reshaped their portfolio to capitalise on the data centre need

It’s no surprise that they have outperformed since IPO.

Substantial cap size

The flurry of mergers and acquisition activity has seen bigger REITs consolidating in Singapore. This gives them the size to be listed on indexes, and also so that institutional funds can invest in them.

Knowing this, how should you invest?

With this vast choice of REITs to choose from, how should you invest?

Some principles that have helped me.

Know when to sell

If you’re wrong, you’re wrong.

There’s no point sitting on your hands, waiting and wishing for the REIT’s pricing to improve. If you see it running into trouble, you should most definitely make a decision at that point to buy more or to sell it off. To prompt lesser analysis paralysis, ask yourself,

Knowing what I do now, would I buy this again?

If the answer is no, you should most definitely recycle your capital.

The best time to ask this question is when you see your stock price falling between 20 to 33%. This was the range that Lee Freeman-Shor found most of the better investors making a decision, so that they could cut losses or substantially add to their holdings to profit more.

The point is that you can be wrong most times, but still make money. Accepting what the market gives you is the only way to survive the market.

Just learn when to sell. 

Buying REITs is for the longer term, passive income

You definitely should not be buying REITs using your grocery money. It should be with money you can invest, and afford to lose

Yes, lose. 

If you’re looking to trade your REITs, find another stock. It’s unlikely that REITs will be heavily volatile, given that the bulk of their assets is in physical real estate that’s hard to move.

The point is that you need to be willing to be patient.

Money isn’t made quickly. Get rich slowly, and enjoy the journey.

If you want money to be made faster, find another instrument. REITs may not be your best option.


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