Thursday, 23 July 2015

S-REITs --- sell now and buy back later when market crashes?

Many S-REITs have released latest quarterly results recently. Most results are in line with expectations.  ( S-REITS results analysis) 

However, dark clouds ( impending interest rate rise) are hanging above the heads of the seemingly well-behaved REITs. What will the dark clouds bring? A storm or a quick thunder shower? I put up some thoughts about the impact of rising interest rates on REITs. See my earlier posts: 

What will happen to S-REITS in 2014?
Can S-REITS still shine in 2015?
Staying focus requires great strength

Firstly, I would like to say that interest rate does not affect REITs alone or the most. All asset class will be affected. As of now, commodity prices, from oil to gold, have already retreated significantly from their post-GFC high. Of course, there are specific reasons for each commodity, ranging from oversupply to China economy slowing down. But probably one common factor here is that USD is gaining strength again, in response to incoming rising interest rate!  Although property markets are more driven by local factors, property prices in many countries (SG included) had passed its peak for this cycle. Apart from various country specific reasons, rising interest rate is expected to rise property's cap rates, and hurt potential mortgager's affordability.  After several years of bull run,stocks prices all over the world are not cheap either. For local stock markets, not only REITs are inherently sensitive to interest rate, but also all other stocks. Many local stocks' gearing level and interest expenses are higher than REITs. Besides, risk-free interest rate is the price (opportunity cost) paid for holding cash. It is the benchmark for all prices. If the interest rate rise, one should expect re-pricing happens to all asset classes, other thing equal.  To investors, it means new few year things could be very different from last few years with near-zero interest rate. 


The near zero Fed Fund rate coupled with three rounds of quantitative easing has inflated asset prices and made dividend paying counters such as REITs exceptionally hot. Is the music about to stop? 





The initial interest rate rise will start the process of interest rate normalization. which is an infection point for world economy. Fed Chairman Ms Yellen have taken pain to stress that interest rate rise would only take place step by step i.e. no sudden jump is expected.  But whether capital markets will also move tenderly step by step is not warranted. Capital markets including stock markets are famous for their frenzy behavior driven by investors' greed and fear. When interest rate finally normalizes, no one knows for sure how will market react initially. One thing for sure is that the volatility will increase for some time. Volatility is generally seen as risks. But volatility also gives birth to opportunities. When opportunities abound, important thing is that you have cash in hand. (See early post: 7 common mistakes in dividend stock investing. ) 

So what should you do with your REIT holdings? 

There is nothing wrong to sell your stocks to take profits. There is nothing wrong to ignore fluctuation and hold quality stocks for long term. 



However, the general rules must apply according to individual circumstance, i.e. investment objectives, horizon, risk tolerance, and also your initial reason for investing. 

If you had bought good steady REITs at fairly low prices and are holding mainly for income, do you abandon all your holdings because current price could see correction? It is easy to sell and lock in profits, but what if the price/income does not plunge, but only have mild correction? Sell at high and buy at low again? Theoretically sound, but not that easy to implement. No one should expect to catch all the price moves. If you expect that, then you are speculators/traders (nothing wrong with that though), not investors. Even legendary traders Jess Livormore once said profit is made by sitting, not trading. 

If you had unfortunately paid high price to buy REITs, and later found that the premium you paid for disappeared in new environment, should you be holding on to such mistakes? Don't call yourself a long term investor if you made a miscalculation, were caught in the high price and forced to hold for long term only wishing to break-even after collecting dividends. Even you finally break even, how about the opportunity cost? Things get worse if the miscalculated position consumes sizable portion of your investable fund. 

From now to 17 Sep (believed to the the earliest time window for Fed to announce interest rate rise), I would think any large position purchase ( not just REIT, any stock) as unnecessarily risky. Since such an unprecedented event can potentially rock all capital markets, holding on to cash is more sensible now. Even if you do see good opportunity, why must jump on to it now? Just wait another two months for clearer picture. To clarify, the stocks(reits included) or any other assets price may not drop, or drop as much as you wish, but at least you do not let yourself be prone to miscalculating the risk/reward ratio. 

However, having said all that, it's important to realize that REIT, as an asset class, has been proven historically to be able to deliver above stock-market-index returns in long terms. The business model is fool-proof, transparent, relatively simple to analyze. Besides, REITs' mandatary regular dividends payout is one feature that makes them always relevant to income investors. After all, what are other business models that are better than property leasing in terms of generating predictable, recurring and steady income and providing hedge to long term inflation?  If you believe in buy-and-hold strategy in physical property investment. You can do the same for REITs as an asset class, baring stock-specific risk of course. Long term investors really do not need to eye on the daily price fluctuations like hawks. ( See my early post: REITs' better liquidity than direct property ownership is a risk?

So will you hold on to good REITs, or would you rather sell now and buy back later? Well. For me, I guess I will be somewhere in between. 

4 comments:

  1. Hi Richard

    Yeah I agree its a little tricky now on the situation. From investors point of view, the key is to constantly review the risk reward ratio when buying and selling, though easier said than done.

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    Replies
    1. Besides that, allocation is another important decision.

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