Investment in S-REITs (updated)
作者：老查理 時間：2019-02-14 19:46:24
I recalled vividly how I really started to look at REITs as a potential new asset class. I had a conversation with one of our interns over his prior internship expereince. He mentioned he spent time compling data and preparing analysis on one speicialized Singapore REIT: Keppel DC REIT, a REIT focused on managing data centres globally. Given the trends of big data and IOT, the demand for data centres is on the rise. As the only specialized REIT focusing on this particular sector, I did do a bit of analysis and decided to invest for the first time in the S-REITs. It started my journey of researching the broader market. I did exit the investment for a decent profit but it would be even better if I contiue to hold on to it. Over time, I have get more and more familiar with the asset class and decide to build a cash-flow machine based on investing in S-RETs.
A little backround of S-REITs To be classified as REITs and enjoy the benefits of the tax-efficient vehicle, the managers are required to distribute at least 90% of their taxible income to unitholders/ investors. Due to the nature of REITs (subject to different sub-types), the recurring dividends which are more or less reliable based on the lease for the period of 2-10 years or more are a great attribute to build a cashflow machine for retirement. REITs are bond-like equity risk profile with risks associated with business environment, property markets, rise of interest rates, downward rental revisions, creditability of tenants in the event of default or being unable to honor the tenancy agreement, etc. The upside comes from the managers' ability to manage the property well to attract high quality tenants and implement the add-on acquisitions to acquire new properties. REITs in general has a easy-to-understand underlying business with relatively predictable cashflows and distributions per unit ("DPU"). We generally sacrifice roller coaster upside (in a short period of time) to gradually increasing DPUs and/or unit price. We need to put it in mind that when it comes to investment, there are always risks. The S-REITs generally have an average of DPU at between 5-7%, relatively higher in comparison to other REITs in Asia. The SGX has tremoundoues disclosure requirements for REITS or S-REITs in general have very good disclosure practices, issueing quarterly reports/ presentations in great details and more frequent distributions (either quarterly or semi-annually). Good managers are expected to grow DPUs over time and thus will have positive impacts on unit price.
Under the environment, I intend to build a portfolio made of a select S-REITs, with exposure to healthcare, industrials, logistics and retails. The purpose is to build a cash-flow machine that can feed itself by re-investing the distributions recieved. Given the long-term nature, it is still early to comment on the current status of the machine as it is still in its infancy in Year 3. S-REITs require relatively little time to monitor.
At present, I have roughtly divide my portfolio into two pockets:
- Equity portfolio (mostly in Taiwan): the intention is to adopt a value-driven approach, select a list of portfolio companies and hope to achieve higher returns in the long run.
- S-REITs portfolio: the intention is to to adopt a dividend-reinvestment approach to grow the base for higher dividends (with less volatility) in the long run.
I hope both approach can serve as a counter balance. If the next GFC comes, the quarterly dividends from S-REITs may be redeployed to equity portfolio with a higher chance for capital appreciation in the long run.