REIT Investment

The history

You must be wondering, how come my portfolio is fully REIT-biased. Before investing, I used to have non-REIT stocks such as Best World International (healthcare), Dapai International (backpack), Macquarie (infrastructure), Breadtalk Group (bread products), and the going-to-sell Mencast Holdings (maritime maintenance). I would say my portfolio then was diversified between many industries and these companies are market moats (strong market power; monopoly). However, less than a month after I entered the stock market with these stocks, the outbreak of Libya War and later the Japanese Earthquake & Tsunami destroyed all the "green" figures of my portfolio. Overnight, my stocks plummeted and I incurred a red figure as high as -$880. Ouch!

For the next few months, these stocks failed to recover back to my purchasing price and I was so frustrated that I sold them away, including the Suntec REIT (now you know REIT is not a sure-win), at a considerably loss. Only Mencast Holdings managed to break out of the devastation and headed for a sharp rise. Thanks to this stock, I cashed in $155 profit but of course far from the loss of $1000 that I incurred in all investments since 2010.

But the good news is, the market is starting to pick up once again. Having spotted this opportunity, I bought Cambridge REIT and accumulated more shares on Starhill Global. With the help of technical analysis, I entered the market again at the right time and now my portfolio is sitting on a $455 profit. When the market moves up further in the future, I believe I can offset all of my losses and in turn cash in profits.



REIT Investment

After conducting research into REIT stocks, I found a few attractive features. Firstly, REIT pays me high dividends of more than 5% (eg. Cambridge's dividend yield is 8%-9%) on a quarterly basis. Meaning, for every 3 months, I can still cash in money from the stock market in the form of dividends even if my stocks are not performing well. Secondly, dividends paid to shareholders do not fluctuate that much and would gradually increase, assuming the economy is performing well. Thirdly, like their attractive dividends, prices of REIT stocks do not fluctuate that much unless they encounter rights issues, failed acquisitions, economic recession, etc. And lastly, it is easier to judge how good an REIT stock is compared to a regular stock - 1) Gearing Ratio, 2) NAV (instead of intrinsic value), 3) a comprehension details of REIT found in informative blogs.

As Warren Buffett says, invest in stocks that you are familiar with. With these 2 useful blogs on local REITs, I gained a lot of knowledge and insights into REIT investment. It is updated very frequently, sometimes daily, with latest prices, insider news, market information, dividend yields and so on.

http://sreit.reitdata.com/

http://reitdata.com/


5 Screens For Selecting REITs

#1 High Current Dividend Yield of >5%

The main reason why I venture into REIT investment is dividend investing. REIT offers one of the highest dividend yields on the stock market and pays 90% of the rental income as dividends to shareholders. By selecting REIT stocks of more than 5%, I am right ahead of inflation rate of 3%-4% currently.

#2 High Expected Dividend Growth

4 determinants of dividend growth - 1) Quality of properties in portfolio and quality of tenants, 2) Expected increase in property prices, 3) Expected increase in rental, and 4) Acquisition of new properties.

My Cambridge and Starhill Global met all of the 4 determinants above.

#3 Low Gearing Ratio of <40%

While higher gearing ratio stocks give you higher potential returns, they run the risk of debt default when the economy experiences a huge shock. However, with a gearing ratio that is too low (eg. Lippo-MappleTree's 10%), the stock may not have the borrowed funds to develop further, thus undermines potential returns. The ideal gearing ratio should be below 40%.

#4 REIT Stock Price Is Undervalued

Same as picking a regular stock, you should enter the market only when stock prices are below their actual values. 2 ways to look at it - NAV and/or Intrinsic Value. Personally, I prefer NAV as it is easily available for viewing on the REIT blogs mentioned and does not need to do all the maths calculation yourself. One may argue that the Instrinsic Value is more accurate than the NAV but I do not find much difference between the two in terms of value. And it is a painstaking process to learn how to calculate the Intrinsic Value (I spent many hours on it as a beginner). Always pick your REIT stocks below its NAV.

#5 The Stock Is Highly Diversified Within Itself

Here is why I am not worried about my portfolio being focused on just 2 REIT stocks. My Cambridge and Starhill Global are widely diversified within themselves. Cambridge specialises on industrial but diversifies its holdings from logistics & warehousing, light industries, developer & construction, to car distribution, and so on. Starhill Global owns Ngee Ann City and Wisma Atria but has retail & office properties in Japan, Malaysia, China, and other Asian countries.

Diversification may spread the risk but it also lowers the returns. By picking a few winning stocks that are internally diversified, I am in fact being focused diversification.