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 



F CL said...

It's a good observation I would say.

Would appreciate if you could do a broader comparison or maybe track the movement of REITs prices with that of bond prices. That will make your argument so much more conclusive and robust.

Because after reading, Im quite convinced but still there are doubts in me which can only be cleared if the correlation is looked into at a greater time frame.

Admin said...

Good analysis .
after the budget 2014 proposed, seems like bond 's return has become lower

not sure if this will boost the REIT market or not. let's see.

I like your blog. mind to exchange as friend's blog list ? Added yours. Thanks .

Admin said...

Can I share your 2 posts on REIT?


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