Hazelle
in Memos & Musings · 5 min read
The Singapore REITs market continued to be beaten down and underwater. This month, the Lion-Philip S-REIT ETF (CLR) which we use as a benchmark for the overall S-REITs market, has broken below the lows that was last reached one year ago in Oct 2022.
As of the price chart taken on 18 October 2023, the CLR ETF is back near the bottom of the Covid lows.
Recently, there has been more discussion on the topic of S-REITs investments where we saw a mixture of opinions. Some are saying that they are going to stay away from S-REITs for now because of the interest rate risks while some think that it is a good time to accumulate some positions.
As with any investments that we embark on, it is essential to set out the right investing mindset so that we know what we are doing and how to manage our portfolio especially during the tough times.
Here are 3 key pointers that we have compiled with regards to the ongoing discussion on S-REITs investments.
Let’s do a quick rewind in time back to the year 2020.
2020 was the year when we went through the Covid pandemic which was one of the worst that we had for years and the virus was highly contagious where the world had to go through lockdowns and countries had to shut down their borders. Some businesses unfortunately did not make it through the pandemic while there are others that thrived during the stay-home lockdowns.
Thankfully, vaccinations were developed promptly to address the pandemic.
When we all thought that things were getting better with the vaccinations and gradual reopening of borders, supply-chain disruptions due to Covid lockdowns surfaced and this contributed to higher prices and inflation for different parts of the world.
Initially the Fed said that the inflation was just transitory but soon, a war between Russia and Ukraine broke out, which drove up the oil prices and further accelerated the inflation.
Then, the Fed stepped in to raise interest rates to curb inflation and we saw one of the fastest and steepest rate hikes in history.
But after which investors start to worry again. They worry that a recession will come because of the rate hikes or we might even get what we call a stagflation, which is a situation in which the inflation rate is high and the economic growth slows down.
The key point here is that negative events are a constant occurrence somewhere in the world. The issues discussed over the past three years are not unprecedented.
If we look back three, five, or even ten years, a similar pattern emerges: there is always some crisis or adverse event unfolding.
Therefore, if one waits for a time when there are no negative events and the news is uniformly positive before deciding to invest, the wait could be interminable—such a day may never arrive.
This is why, instead of basing investment decisions on macroeconomic news—as some investors do, leading them to avoid S-REITs—we consistently share with our community to focus on the fundamentals of companies, specifically their financial performance.
In fact, “crisis” could be opportunities where we get to buy some of the good REITs at cheaper prices. But in order to be able to do so, an investor needs to have the conviction in what he is investing in.
Take for example, Keppel DC REIT recently reported a 3.6% decline in DPU for Q3 2023 in comparison against the same quarter of 2022. The reason for the decline in DPU is mainly due to higher finance costs. Therefore while revenue did increase slightly and property expenses were trimmed down, the higher finance costs resulted in the decline in DPU for the quarter.
Therefore, do keep in mind that even a fundamentally sound REIT is not completely shielded from all external factors that may impact its financials in the near term.
However over the longer term, the stronger fundamentals should help support the business to get through the challenging circumstances and do well.
In fact, this do not only apply to REITs—this applies to any stock in the stock market. Take a look at one of the strongest businesses in the world, Google. Google is a fundamentally strong business with robust financials and has a wide economic moat. But if you take a look at the historical Earnings Per Share (EPS), you will see that there are also periods where the EPS can decline.
Hence, we need to set realistic expectations of how things may move in the financial markets and for the businesses so that we would not be caught off guard or be taken by surprise when it happens.
Many investors in S-REITs tend to focus solely on the dividend yield, overlooking that owning units of S-REITs is similar to owning any other shares in the stock market. The unit price of REITs also experiences price fluctuations.
Therefore, total returns from REIT investments should include both the dividends collected and the capital gain—or, in the case of a capital loss, the dividends collected minus the capital loss incurred.
This concept is analogous to investment properties. Imagine you own an investment property purchased for $1 million.
If the property market is underperforming and the property’s value drops to $800k, the rental income collected over the past year—say, $40k—is still insufficient to offset the decline in property value. Thus, claiming a net profit from this investment would be inaccurate, as the $40k rental income represents only a part of the overall picture.
So, how can we manage our capital gains or losses? Is there anything proactive we can do, or should we simply leave it to market forces?
While we can’t control market direction or the extent of its fluctuations, there are two specific actions we take to manage the risks associated with our REIT investments and to minimize the likelihood of significant capital losses eroding our dividend income.
The information shared above is part of a Zoom market update in October. If you would like to learn more from the full sharing, catch the replay view below!
You may also join our Telegram Channel to receive timely updates on our future sharing sessions.
About Hazelle
Chief trainer of The Moneyball Investors Playbook program and founder of The Joyful Investors, a financial education firm that seeks to help avid investors learn to invest better and make the journey a joyful one. I graduated with a first class honors in Bachelor of Accountancy from Nanyang Technological University (NTU) and started my auditing career in one of the Big Four. I believe that once we know how to build our wealth sustainably, we can then live our best lives ever.
Important Information
This document is for information only and does not constitute an offer or solicitation nor be construed as a recommendation to buy or sell any of the investments mentioned. Neither The Joyful Investors Pte. Ltd. (“The Joyful Investors”) nor any of its officers or employees accepts any liability whatsoever for any loss arising from any use of this publication or its contents. The views expressed are solely the opinions of the author as of the date of this document and are subject to change based on market and other conditions.
The information provided regarding any individual securities is not intended to be used to form any basis upon which an investment decision is to be made. The information contained in this document, including any data, projections and underlying assumptions are based upon certain assumptions and analysis of information available as at the date of this document and reflects prevailing conditions, all of which are accordingly subject to change at any time without notice and The Joyful Investors is under no obligation to notify you of any of these changes.
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