This article appears on Inside Invest.
Both of the panel discussions at REITs Symposium 2019 were so well-received that many of the good questions sent in by the audience had to be sacrificed due to time constraints.
In appreciation of your overwhelming support, however, we picked up some of your unanswered questions and reached out to Kenny Loh, one of our invited panellists of the day to share his views with us. Enjoy!
What drives a REIT’s long-term price appreciation? Increased capital inflows (investor interests) or appreciation of its underlying assets?
The share price of a REIT is driven by both the increase in DPU and also the appreciation of the NAV. The value of the property and rental income will go up in the long term because REIT investment is inflation hedged, as long as the REIT is well managed.
Properties for older REITs are ageing. Moving forward, will more money be required to upkeep properties, thus reducing distributions to unit holders?
It is true that REITs need to spend more maintenance costs to upkeep the aging properties. However, a good REIT manager has the options to do AEI to revitalise the building or sell the older building away and replace it with a newer one. All these actions may help the REIT to enhance its DPU.
Should we avoid REIT ETF because of the tax issues it attracts, in contrast to holding pure REITs?
Tax concessions have been extended to REIT ETFs, ensuring parity in tax treatments between investing in individual S-REITs and REIT ETFs. https://www.businesstimes.com.sg/stocks/singapore-budget-2018/singapore-budget-2018-reit-etfs-to-enjoy-tax-transparency
What are the key risks of investing in a REIT?
REIT is sensitive to economic cycles and interest cycle as the underlying asset is real estate. Real estate has its own investment cycle. Investors should not put 100% investment in real estate sectors or REITs. It is advisable for investors to diversify their investments into different asset classes with minimal correlation.
How to avoid value traps in REITs?
Investors should not make investment decisions purely by looking at the numbers. Qualitative analysis, Macro Economy Analysis and Risk Assessment are important analytical steps to avoid value traps.
What are some of the red flags that we, as retail investors should look out for when we do our homework/analysis on the suitable REITs to buy/hold?
Retail investors are always dependent on the free information available on the internet for research. Those data or news are lagging or old news. Investors need to do more qualitative analysis instead of focusing too much on the financial numbers which can be subjected to financial engineering. Most retail investors cannot differentiate between fact, opinion, noise or rumours in their analysis. The more they read, the more they are confused.
Given that REITs do have many restrictions, e.g.: 90% pay-out, 45% gearing and are relatively secured, do you advise using leverage through margin financing to enhance yield?
Leverage if used correctly can enhance the return. Vice versa, investors will face huge financial burden due to margin call when used wrongly. It is very important for investors to seek qualified and unbiased professional advice which is free from conflict of interest before doing any margin financing.
Kenny Loh is a Senior Consultant and REITs Specialist of a Singapore’s top Independent Financial Advisor. He helps clients construct diversified portfolios consisting of different asset classes from REITs, Equities, Bonds, ETFs, Unit Trusts, Private Equity, Alternative Investments and Fixed Maturity Funds to achieve an optimal risk adjusted return. Kenny is also a CERTIFIED FINANCIAL PLANNER. He has won multiple awards in financial planning and investment planning.