Let's review how 10 yr govt bonds fared vs interest rates for Singapore and the U.S. from pre-GFC to to-date - charts below.
1) Probably due to the "taper" whispers in May 2013, the 10 yr govt bond yields for both Sgp and US have jumped up and stayed around there since, even though their interest rates have barely budged.
2) Interest rates for both countries increased significantly 2004-2007 pre GFC. But 10-yr govt bonds moved sideways roughly. For those who recall, reits and stocks were up strongly over the same period. (Caution: history may not repeat itself.)
[Image: interest-rate&type=line&title=SINGAPORE%...EST%20RATE]
[Image: interest-rate&type=line&title=UNITED%20S...EST%20RATE]
If the reit with good assets like K reit , Starhill Global etc etc , solid B/S with most of the refinancing done for the next few years and are paying more than 6% consistently , believe the ERP is still a good margin for error . Just my personal opinion.
Personally, here are my thoughts:
1) when u invest in reits, you are looking for income more than capital appreciation. So we have to ask ourselves assuming interest spike over the next few years, e.g. To 3-4%, who are the most vulnerable reits?
2) in that context, are u actually able to call the "price" correctly? If u can, maybe you can sell everything and bet your shirt and shorts when that price comes.
3) True is, we do not know the price or even the price range at the normalized rate.
However,
We can eliminate weak reits with higher interest costs or with unfavourable refinancing schedule...
We can look at reits that can continue to grow, in terms of DPU and AUM, the growth can offset some of the interest pressure. If they are able to grow say, 3-5 % consistently, I don't think normalize interest rate is going to kill then.
Reits has been around for a decade, they have seen normalized interest rate before.
I am not saying they will not drop in price when interest start hiking, I am saying should we be so concern about the next 2-3 years, we should perhaps look further and see the role f REIT in our investment plan, perhaps then we will not be so bothered about interest hike...
Just MHO
For retail investors , even with interest hike, how much will the bank hike the rate for the TDs or saving account ? Holding on to a higher yield instruments for a longer period is still a better option than keeping all cash in banks.
(29-09-2014, 10:34 AM)cfa Wrote: [ -> ]For retail investors , even with interest hike, how much will the bank hike the rate for the TDs or saving account ? Holding on to a higher yield instruments for a longer period is still a better option than keeping all cash in banks.
Whether there is an interest rate hike or not, reits will still be favored over bank deposits. Reasons are its high dividends and property appreciation over a period of time and lastly any costs is likely to eventually pass back to its tenants. Do not think many businesses are so stupid to park their funds in it if they do not find any value in it. Vested and will continue to be vested in it.
Many fear high rental costs may kill mall owners , but CMT told their investors in AGM , they have long waiting list for potential tenants , one out many want to come in . CMT choose who to come in.
To invest in Reits, I feel that it is far more important to look at its underlining assets and the sector it is in, than to focus on the interest rates movement. For example, commercial office, especially grade A office in CBD areas is in short supply for the next two years. Many analysts are predicting that rents will surely increase in the next two years, some are saying a double digit hike is possible. Such increase will definitely outpaced the increase in interest rate. Also, I do not know if the current price of Reits has already factored in the possible increase in interest rate. I guess it has to a certain extend. And if interest rates were to increase at a faster rate than expected, than I am sure the price of Reits will falls further. In that case, buying more Reits with quality assets at a lower price will likely maintain the yields we are seeing now, if not better. Reits is a part of my overall portfolio, and it will continue to be so.
I should have started a new thread called "Suitable investments for retirees" rather than post my comment on REITs in this one.
For income seeking retirees, I thought that REITs could form say 10- 15% of their portfolio, especially if one stays invested for some time, select the ones which have good sponsors (eg those which are have a 'quasi-sovereign" ownership, therefore hopefully can raise debt at competitive rates) and where eg fraud risk is minimised.
I don't know whether dividend stocks or ETFs can provide 6% yield - with the same risk as REITs. There are some SGD bonds issued by local companies but those with yields above 4% are mostly in the junk (in the real sense of the word) category, well below BBB-.
Even more interesting are the foreign companies issuing SGD bonds - one called itself secured, but was a deeply subordinated, non-guaranteed SPV whose only asset was shares in other companies. A rather well known sub-continent name but caveat emptor written all over it - and the coupon - 4%!
Sometimes, we human make simple stuff look complicated. attached is the impact on dividend if the interest rate raise
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