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Playing the REITs GameAuthor! : Dominic WhitingISBN! : 978-0-470-82204-3

Summary

Attractiveness of REITs

Diversification

Low correlation between stocks and bonds.

Securities investments in the same property type in different countries have a lower correlation than investments in

different property type.

Liquidity

Traded like stock

Singapore has one of the cheapest prime office rentals compared to other major cities in the world.

Singapore has the potential to be the hub of SEA REITs with REITs market in SEA still in its infancy. However, this

posses problems such as currency exchange issues, other regulations such as different tax and reporting standards in

a cross-border REITs.

Dangers of REITs

Susceptible to financial engineering.

e.g. delaying issuance of new trust units, so that existing shareholders might have a larger share of newly added rental

for the interim period. This is done in hope that by the time the issuance of the new units, rental prices will have risen

and existing shareholders will not feel the drop in income from the trust.

Dubious fees and hidden debts. Yield income is just a part of REITs not the whole part.

e.g. REITs managers might make bad acquisition to increase their fees.

CapitaLand asset light model

Able to sell at a relatively higher price of building to its own trust as investors are more likely to pay higher for a more

liquid property asset.

CapitaLand still keeps a stake(30%) and control of the building!

So now it earns 2 sources of fees

1. Fees for managing the trusts.

2. Fees from managing the building.

This model is proven in the Singapore and China Retail Mall trusts.

CapitaLand will be thus incubating building for their REITs trust, which will take over once the building is up.

Singapore REITs Rules

Able to invest in property abroad

Gearing ratio of up to 60%

Paying at least 90% of distributable income back to investors.

Cannot invest in property development, either own their own or partially

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4 part property cycle.

1. Growth

2. Deterioration

3. Decline

4. Recovery

Factors to take note:

Geographical location of properties

Over-reliance on a few major tenants for occupancy

Over-reliance on a few properties for income

Renewal of lease should be done in a staggered manner

Building quality

Management

Fees

If dividend yield is greater than property yield, there might be some form of financial engineering involved.

Net Asset Value (NAV) / Book Value

1. Replacement Cost Approach (includes construction cost, land price, labour, etc...) -- difficult to access

2. Benchmark to similar sales of similar buildings. -- more commonly employed

3. Capitalization Rate - Net operating income as a % of building value

Discounted Cash Flow (DCF) - Basically, forecasting future cash flow and taking into account the discount rate, or

cost of capital (equity+debt), to get the current desired cash flow

Discounted Dividend Model (DDM) - Same as DCF except the discount rate is the cost of equity, which can be

obtained based on bond rates and the equity beta of the stock.

Financing - From Bank Loan or Commercial Mortgage Backed Securities (CMBS) and at what rate and leverage.

Inflation - Annual Dividend Growth Per Share has to be > than CPI

Learning Points

REITs market is very favorable in Singapore with tax free capital gains and a transparent system. Companies that have an

edge are Ascendas and CaptialLand, which are venturing into cross border acquisition in India and China recently. The

strong backing of the REITs by their own developers also means that an existing market would be present when a

building is completed.

Financial Engineering could be present in REITs reports so investors have to be careful.

REITs proved to be relatively attractive because of its resilience to downturns and high liquidity. It is worth considering

when balancing and diversifying your portfolio.