Are Singapore REITs a Good Investment?

Extracted from http://www.lioninvestor.com/are-singapore-reits-a-good-investment/

This article on Singapore Real Estate Investment Trusts (S-REITs) is long overdue as I already had plans to pen down my thoughts on this topic more than a year ago.

Initially, I wanted to title this post “The Disastrous Singapore REITs Model” but decided otherwise.
So why do I think they are a disaster?

A REIT is an instrument that allows small investors to have indirect access to real estate investment at an affordable cost. Through this investment, you will be entitled to a steady stream of dividends (distributions) from the rental income.

From the developer’s point of view, it offers them a chance to divest of their assets and recycle their capital into new projects.

REITS has been available in other more mature markets prior to the first Singapore REIT listing of CapitaMall Trust (CMT) in 2002. Ascendas-REIT (A-REIT) followed in November 2002 and this was followed by a steady stream of other REITs.

A REIT is intended to be a defensive instrument as it relies on revenues generated from income producing properties held in its portfolio. As rentals are more or less constant, investors are assured of a steady stream of dividends.

A REIT manager earns fees by charging a management fee based on the assets under management (AUM), as well as associated fees for adding/selling properties from its portfolio. The higher the AUM, the more fees he would earn. Needless to say, REIT managers are always on the lookout to grow their portfolio. Which is what many of them did.

It is only possible to justify (to investors) adding more properties to a portfolio if the acquisitions are yield accretive. This means the new properties that is being added to the portfolio must give a higher rental yield than the yield on the REIT itself (at the current stock price).

In 2004 to 2007 when the stock market was booming, many of the REITs were trading at a high valuation and had yields that were quite low. So it was easy for a lot of REITs to go on an acquisition spree using either debt or equity (or a combination of both) to finance their purchases. Some of them used too much debt which resulted in highly geared balance sheets.

As most of the REITs managers were just benchmarking their gearing levels to their peers at that time, everything seemed normal so everyone just concentrated on growing their AUM. Every acquisition was followed by a press release highlighting the good news about how so-and-so REIT has grown and is now bigger. Come reporting time, they could also put a positive spin on the results by reporting higher earnings or distributions (in absolute $ terms) even though there could be just a marginal increase in the distribution per unit (DPU).

Investors are also happy as they were enjoying both their dividends and capital gains from high valuations.

The reality check came in 2008 after Lehman Brothers collapsed. Due to writedowns on the property, many of these REITS discovered that their gearing had become untenable to the banks. It was a very challenging time for them as the debt market was practically frozen up at that time as well.
In the end, most of them with over-geared balance sheets had to raise cash in the form of equity. Raising equity at a time when the share price is low can be very dilutive to shareholders who are not part of the equity raising process.

One example is when you do a share placement to preferred investors.
Another example could be retirees who had invested all their life savings in REITs for the dividend streams and had no more money to take up their Rights issue. Perhaps some of them also didn’t really understand the implications of a Rights issue and didn’t wish to fork out more money to subscribe for their rights.

For those existing investors who could raise the capital to subscribe for their rights, they are returning most (if not all or more) of the dividends they had collected back to the REIT. Don’t let the discounted price fool you as you are essentially paying just to maintain your percentage shareholding in the REIT.
This is the reason is why I deem Singapore REITs to be a failure. Touted as a defensive investment with a steady income, it has failed to deliver its promise.

However, not all the REITS are failures as there are some exceptions. There are a few REITs that had kept their gearing relatively low throughout the years and did not have to raise any equity during the crisis. While investors in those REITS might have suffered a paper loss in capital value during the crisis, the prices have largely recovered by now.

Long term investors would have been well rewarded with all the dividends they had collected over the years if they did not panic and sell out at low valuations at the wrong time.

The reason why I’m writing this post now is that recently, some of the REITs have returned to the acquisition path again. As their stock prices have recovered from 2008, they can now make yield accretive acquisitions again.

Will history repeat itself?

As an investor, what I am looking for is not a REIT that keeps on growing its AUM. All I really need is one that can manage its existing assets well and not get into any (financial) trouble.

A very good site to track Singapore REITS is this website – SGX REIT Data. It is updated daily with the latest news and provides a comparison of the different REITS including their gearing, dividend yield, etc.

Bollinger Band

Extracted from http://www.forex-central.net/bollinger-bands.php

Using the Bollinger bands

- Identifying a change in the trend
Price changes tend to occur after a tightening of the bands.

- Measuring the strength of a trend
The greater the spread between the lower and upper bands, the stronger the trend. Prices that go beyond the bands are a strong signal that the trend will continue.

- Playing on bounces between bands
The bands can be used as support and resistance levels. After having touched a band, prices have a tendency to want to touch the opposite band. This technique can be very useful in a market with no clear tendency or when the bands are parallel.

Even though Bollinger Bands can help generate buy and sell signals, they are not designed to determine the future direction of a security. The bands were designed to augment other analysis techniques and indicators. By themselves, Bollinger Bands serve two primary functions:

* To identify periods of high and low volatility.
* To identify periods when prices are at extreme, and possibly unsustainable, levels.

As stated above, securities can fluctuate between periods of high volatility and low volatility. Being able to identify a period of low volatility can serve as an alert to monitor the price action of a security. Other aspects of technical analysis, such as momentum, moving averages and retracements, can then be employed to help determine the direction of the potential breakout.

Remember that buy and sell signals are not given when prices reach the upper or lower bands. Such levels merely indicate that prices are high or low on a relative basis. A security can become overbought or oversold for an extended period of time. Knowing whether or not prices are high or low on a relative basis can enhance our interpretation of other indicators, and it can assist with timing issues in trading.

1. PRIDE: Many of us believed that we had the right winning strategy after we had made a series of successful trades. Pride then began to creep in and often led us to become over-confident, complacent, inflexible, stubborn or resistant to changes. Pride comes before a fall and humility before wisdom. The fact is that, in a rising bull market, just about everyone can make profitable trades easily and to behave like an expert, as little knowledge, skills or experience is necessary to be successful at this time. Our greatest enemy in the stock market is truly OURSELVES. We have complete freedom to decide what and when to buy or sell. Yet when things go wrong, why do many decide to blame, the big boys, analysts, falling US market, our remisers or friends or anyone else (except ourselves)? If we repeatedly achieved the same poor end-results, it should become obvious that we need to examine our operating method and ourselves.
2. FAILURE TO FACE REALITY & TO DICOVER A SUITABLE WINNING STRATEGY: It is a well-known fact that the majority of gamblers, traders, punters and speculators lose money. For many, stock trading is most exciting or thrilling so long as the trade is in their favour but it can also be very stressful and agonizing when the trade is against them. However, the reality is that not everyone has the right temperament, knowledge and skills to be a successful trader. How many of us are able to cut loss easily on a bad trade? Sadly, many of us buy a stock as a “speculator” but ended up as an “unwilling investor or baby-sitter”. Most people also tend to release (sell) too early all the “eagles that could soar to the sky” and to keep with them what are mostly “lame and sick ducks”. Hence, it is common to meet “investors” holding a long list of stocks that are mostly in losing positions. The market also has a clever but harsh way of dealing with long-time holders of losing positions. Occasionally, one of the lame ducks would miraculously recover and start to run far enough as to enable the owner to sell it with full recovery of capital loss plus some profits. This duck then would immediately transform itself into an eagle and soar to the sky bringing much grief and heartache to its former owner. It is for each individual to know his own strength & weaknesses & work out a suitable winning strategy for himself taking into account his risk appetite, resources & knowledge.
3. MARKET BEHAVIOUR & TIMING: In a major market correction or sell-down, many stocks often gave up several months of their price gains in just a matter of several days. Hence, the profits accumulated over several months of numerous trades were liable to be wipe out in just a few trades that suffered heavy losses. For those who decided to cut loss and concede “defeat”, their positions were rather similar to that of generals, like Napoleon, who had fought and won almost all their battles (except the last few ones) but lose the war. An important factor to understand was that the stock market generally moved ahead of fundamentals by several months. A bull market usually started in the face of bad news and bad fundamentals and ended when the economy usually remained strong and corporate earnings still rising. This accounted for the existence of bull and bear traps that many fell into. A Conjuror (Magician) is able to fool his audience because he is always “one step ahead” of them. Likewise, the stock market, always being “one step ahead”, has no difficulty fooling the “herd” through false rallies, breakouts and breakdowns. Investors who understand such behaviour pattern and who could keep themselves one step ahead of the herd, would likely have won at least half of the battles and the war because they would be buying and selling before the herd did. For one to do this, one may need to have a complete change of mindset.
4. THE BIGGER FOOL THEORY: When euphoria surfaced in a bullish market, many would be lured into chasing speculative stocks because of the presence of bigger fools willing to buy them at increasingly higher price. Speculative plays often ended abruptly; and when that happened their stock prices could see sharp falls rapidly bringing hefty losses to those who got caught.                                                                                                                                                                                                                        
5. Caught In Vicious Cycle: An investor who bought a stock at the high end of the bull market would invariably be holding it (regardless of whether it was a "defensive stock', “blue chip”, “corn chip” or “potato chip”) with higher downside risk and lower upside capital gain. When a bear market arrived (always unexpectedly), it would just be a question of time before he would be holding and sitting on a losing position (always  painful to cut loss & not many could take it). Unless he had averaged down his entry price, it would usually take a few years or the next bull market for him to recover from his losing position. By that time, the market would again be on the high end; and being so relieved and happy to be “set free from captivity”, he would most likely liquidate the stock with some profit but only to see it gone up much higher as was often the case. Being frustrated, he would likely buy into another stock, which would then also be at a high end; and hence, faced the high risk of being caught in another bear market downturn and becoming a “baby sitter” once again. This is one very bad move that all investors should strive to avoid.
6. 1) when 1 of the 3 happens, cash out immediately. A) resignation of auditor, CFO or independent director. B) when borrowing increase significantly without utilization o internal resources first. C) when there is significant insider sell out, stake must be significant to avoid being overly cautious . 2) next, sell out sometimes after the 4th q results and wait for audit to be complete before re-entering. If price cheong during this window period, too bad.