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
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.
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
(Source: http://www.bnm.gov.my/index.php?tpl=489&sdate=2013-09-02&lang= )
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
2 comments:
very shallow assessment
Haha.. IC IC.. U must be having something that I can't see to share with me. Please share it and correct me. Thanks!
p/s: Show urself as well
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