Wednesday, July 26, 2017

Three Reasons Why Now Is Not a Good Time to Invest in REITs

Three reasons why it may not be a good time to invest in REITs now:
  1. Federal Reserve raised interest rate twice this year in Mar and June by 0.25% respectively. It is expected to raise interest rate at least one more time later this year.

    a. Such increase of interest rate have impacts on stock market especially on dividend yield stocks like REITs. When interest rate increases, market expects higher return from dividend yield too. (note: since risk free fixed deposit interest return increases, funds would expect dividend yield increases too.) With REIT rental income and dividend distribution remain the same amount (note: since dividend amount distribute depends on business performance), share price is expected to drop so that dividend yield will increase. REIT price (and bond price, dividend yield stock price) is expected to come down when interest rate goes up, UNLESS dividend pay-out increases (which is unlikely).

    b. All REITs borrow money to finance purchase of properties, raising interest rate means their cost will be higher and profit will be lower. (therefore unlikely to increase higher dividend to match raising interest rate return)

  2. Retail malls in US has been going down trend due to Amazon. Many malls in US has closed down. This should be a trend due to online retail. Many REITs in Malaysia are holding primarily shopping malls too, i.e. Capitaland, IGB REIT, Sunway, Pavilion, KLCC, etc.

    So theoretically the trend of online retail may have adverse impact on REITs that invested heavily in less important malls.

    (Note: I don’t think popular malls like Mid Valley and Garden (owned by IGBREIT) will face the fate like those malls in suburban US.)

  3. REIT’s earnings growth is not good. REIT earns rental income. You need to buy property to increase renting space in order to increase profit and dividend. This process of growth is generally slower than many other industries.

    In general investor don’t buy REIT for growth, they buy REIT for stable income and good dividend yield.

    (In certain economy phases, rental income is very stable. Therefore it is a good vehicle as dividend yield stock for 5% - 7% annual return.)

It also means,

  1. Buy REIT during the economy phase when interest rate start to fall from its peak (not now, not in at least 1 year time). That is the time when REIT price will hike; AND
  2. Buy REITs that invested in warehouse (for online retail) and probably not malls in general (but may be specific popular city’s malls like IGBREIT)

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