Wednesday, 2 October 2013

The Recent Drop In REITs Is Just A Bump In The Road?

Reits have tumbled in recent weeks, removing much of the froth that had accumulated in the sector over the past year. Still, the sector is above its 2010 and 2011 levels, before the third round of money-printing started driving up prices last year. The FTSE ST Reit Index has tumbled 21 per cent since its peak in mid-May, taking it to an 11 per cent loss for the year to date. 

Analysts say the price falls could be attributed to funds flowing out of the region and investors demanding higher yields as Fed looks likely to begin slowing its money-printing. However, the fundamentals and operations of Singapore Reits remain solid. "Despite reporting a firm set of financial performance in the second quarter of 2013 (with top line growing and stable interest costs), Singapore Reit share prices continue to remain under pressure," said DBS Vickers Research this month. "The weakness in share prices appears to derive from fund outflows and heightened required returns rather than weakening fundamentals." Macquarie Equities Research said that the latest results of Singapore Reits proved that their income streams remain resilient. "Almost all the Singapore Reits under our coverage reported in-line results. We expect distribution per unit growth of 3 per cent in the 2013 financial year (for the sector) and 4.5 per cent in financial year 2014." Macquarie said that rental growth was better than expected, especially in the industrial sector. It is "overweight" on Reits and "underweight" on Singapore residential developers.

Reit prices remain above levels seen in 2010 and 2011 - when the economy was recovering strongly from the global financial crisis of 2008 and 2009, and before the Fed's bond-buying spree drove up prices last year. The FTSE ST Reit Index traded at an average value of 641.58 points during 2010 and 2011, so its current value is still 9 per cent above that. The average yield of Singapore Reits was higher at 6.05 per cent during those years, compared with the current yield of 5.3 per cent. Unit prices move in opposite directions to yields. When Reit prices fall, distribution yields will rise. In short, this means that you would have got a better deal if you had bought in 2010 and 2011, compared to now. However, buying now would still be better than if you had bought in May this year.

Now we are entering Oct's Quarterly report season, let's watch Reits performance. With the dividend coming, Reits price should be steady and get some support, before next big move.

Right now, let's hoard some cash. Do Not hate cash for its negative after-inflation return, because cash, as an asset class, is not supposed to generate return for you. It serves as insurance, functioning as non-expiry American-style option. When market plummet irrationally, do not forget that only the ones with cash have the chance to get cheap deal.  Investing is always about the right timing and right class asset.

Bumpy roads ahead. Let's drive carefully.

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