Sunday, October 11, 2015

REITS - Thread with Caution

As a dividend income investor, i have ALWAYS been incessantly tempted to plonk some money into Reits. Just imagine if i had all my current stocks and bonds sunk solely into some 8% yielding Reits, i would have bumped up my yearly passive income to more than $27000 per year. If i further plonked all my current warchest into Reits, wow, i will be a really happy dude, with flights of fantasy swirling around my big head.But i won't.

A Friend Who Keeps Asking To Borrow
I just can't seem to get around the fact that how can a business entity continue as an ongoing concern FOREVER when they hold LEASEHOLD property and pay out 90% of their income to unitholders , meaning ONLY 10% left to pay fees and loans. It implies that the loan is never repaid BUT the property will definitely depreciate, which further implies that gearing will appreciate , which further implies that more capital fund raising will be needed which MEANs that more capital from unitholders need to be plonked or face the spectre of dilution and hence lesser dividends. It comes as no surprise imho, that the gearing for Reits have been raised from 35% to 45% for smaller ones across the board who dont have the financial muscle of the larger rated Reits. ( 60% to 45% for rated Reits).
*I am ok with Reits that hold Freehold properties.

REITS Are For Trading and is not Passive Income
"OMG, does this dude knows what he is saying". Obviously against common beliefs as i am trying real hard not to be a lemming. REITS are perfect investments during times where there is a shortage of liquidity and bloodshed where no one wants to lend anyone anything, think Great Financial Crisis, where dividend yields can be as high as 20%. Hold it for 5 years, you get back all your money. Not now when interest rates are rising.
One can also play the rights game if one has spare cash, go google but this doesn't yield that much and makes this not exactly passive income.

Financial Engineering Galore
There is so much financial engineering going on and the latest buzzword is income support. Credit is to be given to for absolute clarity in this area. Table is solely theirs and by the way they have pretty good articles which are un-lemminglike.

Quite like foreign investment properties advertised in Singapore Press Holdings(SPH) where they say rental yield is guaranteed for 20% for first 3 years, worst, some don't even say. What they essentially mean is that they have priced the property really high and using these funds to return you in the form of income(rental) for a given period of time, making the high price justifiable.

It will be interesting to see how the Reits below will fare after income support is removed, starting in November which coincidently is around the time for another round of talk by the FED about whether they will raise rates. Quite FED Up with their delay. Get it?Funny?.( I still dont think they will raise rates though.)
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