Tuesday, September 10, 2013

Is REITS still a good asset or safe asset to invest now? (Part 2)

In the previous post, I mentioned about the retailers and the FD as well as the treasury bond yield. In this post, which is the most crucial part as I will talk about the relation of treasury bond yield and the Institutional investors. 

As What I mentioned in the previous post, the 10 year treasury bond yield had rose since May and now at the point of 2.88% while the 10 year Malaysian Govertment Securities yield is now standing at 3.89% which rose from 3.11% on 10th of May 2013.

2nd , I would like to talk about the instrument where the Institutional can play with. Why is Goverment paper is important to the investors? This is because its almost a risk free investment as it is being guaranteed by the goverment and the only risk is the govermnt default on it. On the other hand, this instrument is only available to the sophisticated investors, which is the investor must have at least RM2 million net worth to play this game.

In order to let most of the retailers understand about the instrument, I use FD as something similar which helps to let the retailers understand more.

Now we talk about REITs. REITs is an investment that gives us return from the rental of the real estate. Is it risk free? Its almost a risk free but not totally risk free as they might have accidents or unforseen events. As we know, they usually pay 90% of their income as dividend but be mindful of the drop of income too. Thats 1 of the risk.

So what does REITs has to do with the Treasury rate? This is important as REITs and Treasury bond are both investment that guarantees dividend yield and return. As a result of that, these 2 can be said as the closest competitor for fund managers to invest in.

Why? Imagine, you are a fund manager and the guaranteed yield of MGS or treasury is about 4% while the REITS will be paying 6.4% yield. With the bumpy road ahead, which investment will you put more in? You might still say that you will go for REITs right?

Undeniably, REITs stil offer a better return but don't forget its not risk free, and the fund managers might choose invetment that is risk free to make sure they wont lose their money. There are some evidend which I can find from local market and this might convince you.

As we know, the US 10 years treasury yield rose on May according to the chart.

 According to the 10 years US Treasury Bond chart, the yield started to rose on the begining of May which is even earlier than the announcement of Ben Bernanke. This shows that even in US also has insider trading.

This is the yield chart of MGS. This is the best that I can find but too bad that it doesn't show the month. To get more details of the yield, please go to the link below. 

In order to proof that my theory is right, I will show you the changes of the share prices of REITs.

The Chart above is Star Hill Reits where you can see the share price started to fall on June.

The chart shows that the UOA started to come down since end of July.

 The IGB Reits had started to drop since May, which best represent the theory

The Sunreits was dipping since May too!

CMMT was dipping on MAY too!

Hektar started to dip on may too!

Amfirst started to drop on May too!

Pavilion Reits started to dip on May too!

Axis Reits started to drop on mid June.

Why do most of the price for REITS drop on MAY? Is it coincidence? NO!!! It's because of the rising yield! This does not only happen in MALAYSIA but SG too!

SUNTEC REITS in SG, fell on MAY too!

All of the dropping in prices had shows that the demand in REITs was getting lesser as Bond yields rate are rising. This was due to the fund had shifted from REITs to Bond which is risk free and now giving a higher yield.

Still not convince?
Lets look at the formula of yield.
As we can see, when we invest in Risk free instrument in the past, it pay us 3.11% on May and the REITs were paying 6.4%. In order to make us invest in REITS, the REITs has to pay a premium of 3.29% for us to invest in it and lets assume thats the return that required by the investors to take the risk in REITS.

As our Malaysian Goverment 10 years treasury bill is now paying 3.89% , so to attract investors to invest on REITS, thats mean they have to pay a premium of 3.29% + 3.89% of the risk free rate which equals to 7.18% right?

Can the Reits afford to pay more for divident? Lets say in the past, a REITs was paying 6.4 cents per annum and the price is RM1.00 which means it has a dividend yield of 6.4%. Due to the rental was a fix income and couldn't adjust as u like. So how could you makes your yield to become 7.18%?

As a result, the share price will have to adjust to 0.89 cents to give a 7.18% yield where the payout of dividend remain 6.4 cents. So do U think the price of REITs dropping is not related to the rising yeield of treasury bill?

You may say that the capital flight of foreign funds might play a big role on the price drop but certainly, the rises of yield does play an important role too!

Anyway, seems like I had debunk that REITs is not a 100% safe investment isn't it? To the readers that thinking of buying REITs, It will be a good buy if U r satisfy with the yield that they are giving right now and you are able to hold until the end of the day without being scare off by the falling price, or else you might have to think again whether is it worth to invest in REITs. 

Although it's still unclear that whether is FED going to tapper the QE or not on this coming FOMC meeting but it's certain that they will tapper it sooner or later as well as our OPR and even BLR. As a result, the yield is going to raise in the future and this going to dampen the REITs market. To Hold ? make sure you are able to average down in future. To sell? Is this a good price? How low will it go? It's always a million dollar question. 

To the reader who think that this is a shallow assessment, do u still think that this is shallow after looking at all the drop in price and all the relationship of the matters above? Appreciate if you could share me your view after reading this. Thanks!

Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions 


Tuesday, September 3, 2013

Is REITS still a good asset or safe asset to invest now? (Part 1)

In the past, we were being told that REITS is a very conservative instrument and very defensive as it is giving out its earning as dividend, but is REITS that good actually? How bout the capital appreciation as well as capital protection? In this article, I would like to share some of my thoughts regarding this instrument. 

To evaluate whether is it a right investment now, we will have to look at the few factors that will causes the price movement of the REITS.
1st Interest rate
2nd Occupancy rate
3rd The demand on Reits 
4th Increase in the Property Value
Looking at the factors above, I believe that the 1st and 2nd factor is the issue that moves the demand of Reits, while the 4th factor will be the growth of economy.

Looking at all the factors above, I think Interest rate is what we should concern the most for the current situation.
As we know, Reits is where we invest to get return which is generated by the rental income of the Real Estate. As long as the Real Estate is able to generate income then we are able to get return in dividend. In order to generate more income, the management will always try to utilize their space and rent it out which we can saw the renovation done by Mid Valley where the food court had now turned into a more high class area which will generate higher return.
The issue here right now is, how much rental income can they increase in a year? Lets say they are able to increase 5% per year which is really fantastic to me and its not easy to do so.
As the rental income is not easy to grow by every year, lets assume that they didn’t drop either which will make u have a clearer picture later. 
Now we will put our attention on Interest rate
After Bernanke speech regarding QE tappering, US 10 years treasury bill price had drop which also mean that the interest had gone up. (Treasury bill is the instrument for them to control the interest rate)
(Source:  http://blouinnews.com/66006/story/us-bond-yields-hit-2-year-high)

On the other hand, Our Malaysian Govertment 10 years Securities rate had shot up from 3.48% (03/01/2013) to 3.98% (02/09/2013). 
(Source: http://www.bnm.gov.my/index.php?tpl=489&sdate=2013-09-02&lang= )

(Source: http://www.tradingeconomics.com/malaysia/government-bond-yield )

On 29 August 2013, Indonesia had rose their reference rate by 0.5% from 6.5% to 7%  as well as their deposit facility rate by 0.5% to 5.25% in order to stabilize their currency which I couldn't really understand much why are they doing so when they are facing high "cost push" inflation as well as the step will jeopardising their economy growth. 
( Source: http://online.wsj.com/article/SB10001424127887323324904579042590447253328.html )

After looking at all the example that I showed above, my question is when will BNM increase our OPR? 

It's understand that our Governor saying that the interest rate is good enough to bolster our economy growth, but this statement only indicates that the she will not reduce the interest rate. She won't reduce interest rate doesn't mean that she will not rise it! According to most of the economist in Malaysia, they believe BNM will increase the OPR by 0.25% earliest by next year, but I would say capital flight is a wild card to the BNM which might causes them to raise it earlier just like what our neighbour did.

How does the interest rate affect the REITS?

Imagine, you have RM10,000 and you are a conservative investor. You are looking at some instrument that is safe and it will be best if its capital guarantee as you are conservative. In the past, the REITs averagely paying 6.4% return per annum according to http://www.thestar.com.my/Business/Business-News/2013/04/23/Malaysian-REITs-losing-lustre.aspx. In order to get the 6.4% return, you will have to take some risk such as such capital depreciation from the investment, risk of lower income in future and risk of disaster. There are lots of risk where you will have to bear in order get a return of 6.4%.

Looking at the Fix Deposit rate in Malaysia, you can get as good as 4.01% interest rate for 12 months Fix Deposit where your money is being guaranteed by PIDM up til RM250,000. The only risk that I can forsee here is Inflation Risk. This 4.01% is according to the research done by savemoney.my. 

As our Overnight Policy Rate (OPR) is just about 3.0% now and is anticipated to increase in near future which will causes the rise in Base Lending Rate (BLR). If such case happen, the bank will have more room to increase their Fix Deposit rate in order to attract more funds to park in their vault while maintaining their profit margin. 

If the Fix deposit is increase up til 4.25% per annum, will you still place your bet on REITS which gives you about 6.4% by taking more risk? Will you shift your money from REITs to FD? When you feels like switching your bet from REITs to FD, hence you will create a situation where Supply is more than Demand for REITS and you will have to sell it cheaper in order to get back your money!

On the other hand, those who wanted to invest in REITs will demand a higher return rate such as 8% per annum for taking the risk of REITs. 
For an example, a REITs is now trading at RM1.00 while paying RM0.06 per annum which is about 6% per annum. In order to get 8% return, we will only buy the Reits when it is trading at RM0.75. 
Why? This is because with the dividend of RM0.06, you will only get 8% return by buying the REITs at RM0.75.

As a result, do you think it is still a good buy now? Unless you are happy with the return rate given by the REITs now and able to hold it for a long period, or else I don't think it is a good bet in Malaysia.

 Other than the effect of the hike in interest rate being discussed above, there are still some other factors which will affect the price of REITs. Please stay tune for the the 2nd part. Thanks for reading!

Appreciate if you could share your thoughts by dropping your comment down here. 

 Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions


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