Understanding 3 Key Risks of REITs and Adding S-REITs to Your Portfolio April 19, 2018
In the past decade, REITs in Singapore have become increasingly popular as an investment vehicle. Not only are they a solid choice for dividend income, they also have the potential to appreciate in price to yield additional capital gains. However, as with any investment, there are always risks involved when it comes to investing your hard earned money in them. In this week’s write up, we will go through three common risks that people tend to overlook when investing in REITs.
Typically, investors believe that REITs are stable in both price and dividend distributions. While this is true to some extent, we should be wary of market conditions that may change overnight. We need to look no further than May 2013 when markets reacted violently to what is now famously known as the “Taper Tantrum”. REIT prices were not spared from this – as you can see in the example below:
A close to 30% drop on AIMSAMP Cap Reit during the Fed’s Taper Tantrum
While there are measures in place to protect the interest of REIT holders in Singapore (i.e. maximum aggregate leverage of 45%), investors have to be wary on the effects of debt on the balance sheet. When a REIT uses debt to finance their acquisitions, they may not have the financial ability to build up enough cash to repay the debt when it’s due. This may result in the REIT refinancing their debt, possibly with a higher interest rate. Higher interest rates result in higher borrowing costs which may cause the REIT distribution per unit (DPU) to drop. In a doomsday scenario, if the REIT is unable to secure refinancing to make good its loan repayments, it will have to liquidate its assets/properties to pay off the loan. Investors looking at this matrix can review the debt maturity profile of the Trust, which is often shown in their quarterly results. Having a significant level of maturing debt in a single year is a red flag that investors would need to pay more attention to.
Concentration risk can come in many forms, but we’re mainly concerned about two major ones. Firstly, does the REIT derive most of its value from only a few assets/properties? If anything does happen to the property, the REIT valuation will take a big hit. Similarly, does the REIT derive rental income from only one major tenant? Are there tenancy agreements that may cause the rental income to become variable? What will happen if the tenant decides to switch out from that property into another one and how would it affect the current DPU of the REIT? Investors will have to be prudent about these issues when choosing a particular REIT for investment.
What can an investor do?
There are many other risks involved with investing in REITs which we have not covered in this article. We understand that it is hard for retail investors to perform an in-depth analysis and/or due diligence of the REIT in question and even harder to time the market.
For investors who do not have the time and want to get into REITs as an investment, you can consider Lion-Phillip S REIT ETF as an alternative investment tool to directly buy into a basket of more than 20 SGX listed REITs at a low cost. This will allow you to diversify your investments immediately, reducing the overall concentration risk. Another good reason to consider getting into this now is because our local tax authority is removing the tax on distributions for S-REIT ETFs (previously 17%), so your dividend income from the ETF will not be penalised.
Timing a market is not as easy as it seems. The market is driven by events that nobody can predict, and these can include unexpected rate hikes, change in tariff policies etc. The Share Builders Plan we have here in Phillip is a great way to filter out all these events by dollar cost averaging. This is good for investors who have a long investment horizon.
You may find out more details for the ETF and our Share Builders Plan at the following links:
If you wish to know more about investing, feel free to approach your designated Trading Representatives or our friendly Representatives at a Phillip Investor Centre near you.
About the author
Mr Edwin Choo is a securities dealer that is part of the HQ dealing team. As an securities dealer, he specialises in providing equity-related advisory for clients. His personal objective is to ensure that all clients are able to make sound investment decisions to maximise their investment returns. He applies a wide range of techniques to analyse securities, both technical and fundamental, and he believes that only with a combination of both can an investor make a clearer decision on an investment.
Edwin is frequently looking at different trading ideas and often shares his strategies and market insights with his clients. He is also actively engaged in monitoring portfolios for his clients and is constantly thinking of new ways to improve their equity portfolios and return on investment.
Edwin holds a Bachelor of Business Degree (Hons), majoring in Banking and Finance from Nanyang Technological University.