chewmark

Property investors invest in physical properties for 2 reasons.

– 🌳 Capital appreciation
– 💵 Rental income.

With REITs, investors can invest indirectly into real estate, and receive revenues generated from these assets (primarily rental income) at regular intervals. The payouts come from the distribution of cash flow generated by the properties that a Reit owns.

Just as Dividends is to Stocks, Rental income is the lifeblood of Real Estate and REITS.

🩸 This crucial lifeblood (rental income) therefore enables REITS to pay at least 90% of their annual taxable income towards shareholders and borrowers. This dividend policy allows them to enjoy tax transparency treatment by IRAS.

📉The yield is calculated by dividing expected distributions over a 12-month period by the trust’s current unit price.

Now, Covid-19 has definitely impacted this scene because an “Extension of Permissable Period for Distribution of Taxable Income” was drawn up to help the S-REITs (REITS listed on the Singapore exchange).

– Think of this move as the Government allowing these S-REITs more time to consolidate their thoughts and to distribute their dismal income slowly.

After all, Retail, office and hospitality REITs did suffer more than those in the industrial and healthcare segments.

Let me now share my thoughts on why REITs may not be as attractive as it seems, given today’s situation. You really shouldn’t just have blind faith and jump into it just become the others are doing it.

1. 🧠 Don’t Confuse Investor Sentiment to Actual Revenue on the Ground.

– The true earning visibility of businesses in these REITs lag far behind what investors feel. Just because the huge discounts in the REITs pricing has narrowed since Q1 2020, the YTD performance for all, less Healthcare, is still in the doldrums.

2. ✂️ Rental Arrears Impacting Real Estate. Simply put, in reality, many of the industries that the REITs are operating in, have not fully recovered.

– Retail, Office and Hospitality Business have not been receiving full rents from their tenants because tenants are struggling to make ends meet with extremely low traffic footfall and meagre daily revenue.

Let’s just look at human traffic flow. With traffic flow designed for one safe entry and exit in shopping malls so that all movement are controlled, many shops have been directly affected.

Last week, when I was at VivoCity, the Char Siew stall hawker at Food Republic, shared with me that his takings for the entire day was just $70! One look around at the normally bustling food court, and I saw less than 10% of the tables being occupied. And this was already 5pm!

It was the same sad story at Forum and Hilton Hotel yesterday, because customers were being mindlessly herded only to the front of the shopping centre.

You see, humans would normally find the easiest shortcut to enter any location. If they have to go though only one long route just for safe entry, this hassle will put many people off. This effect is compounded as they simply refuse to go out of their way to “shop and dine”. Ask any shop owners and they will complain to you.

3. 🕸 Long Road to Recovery in the Aviation, Tourism and Hospitality Space. The hospitality industry is well dependent on the aviation industry. Government financial relief was and remains crucial as airlines burn through cash.

IATA director general Alexandre de Juniac commented that, “On average, every day of this year will add $230 million to industry losses. In total that’s a loss of $84.3 billion. It means that—based on an estimate of 2.2 billion passengers this year—airlines will lose $37.54 per passenger.”

In other words, if the aviation industry fail faster than the help received, this will directly impact tourism and the hospitality sector, and thus the REITs.

WHAT DOES THIS MEAN TO YOU

✅ Rental income is just one component among many factors, to determine if a business does well. Therefore, the current performance of REITs is only but a lagging indicator and reflection of the true business ground sentiments.
Expect more trouble in the upcoming quarter!

✅ You can still make massive losses as blind faith in REITs will not make you the ROI that you desire in the long-run. They are not the only asset class that you should rely on.

✅ Be open-minded and create multiple streams of passive investment income. You may wish to diversify towards Multi-assets portfolio as well.

#WealthNuggetsWednesdays
#MARKofLeaders
#XMarksTheSpot