Monday, December 20, 2021

The single most important factor for Reit investing

I have probably only broke even or made a little over 6 years of investing in reits on a total basis, meaning including the dividends. This is a bad outcome. We don't have many 6 years of experimenting. 

Upon reflection, i realize that investing in reits is really about trusting the people managing the property portfolio are good at their jobs and most importantly, having as little of the principal-agent problem as possible. 

In my opinion, reits suffer a lot issues related to the principal- agent problem as the underlying properties are rather illiquid and the range of valuation of a property can be very wide and rather subjective. Unit trust ( and for the matter all investments) do have such agent issues too but since the underlying are securities traded on exchanges, there is more transparency in a sense. The more opaque or illiquid the underlying in, the more such agent issues arise.

Principal agent issues related to reits are aplenty with some examples as follow:
  • Property is acquired at a high price from sponsor, with rental support given by sponsor to increase the property yield, hence book value is increased. 
  • Properties are being bought and sold frequently with transactions being the primary focus as reit managers get acquisition and disposal fees. 
  • Reits being the dumping ground of sponsors. 
  • Reits managers focus on increasing the asset base as their management fees are a percentage of the assets managed. 

I think it is a given that most, if not all reit investors, invest in reits for their distributions. More specifically , distribution per unit      (DPU).

The effect of sub-par reit managers will certainly tell over time with DPU decreasing. 

Hence, the single most important factor is to select reits whose DPU has shown an increase over time.

Even though i have lost money in reits, i still believe in it as a good asset to have for retirement but being selective is important. 

I have heard many feedback that reits are bad for retirement because of the many rights issues. If one do not have the spare cash, one will be diluted. The Supplementary Retirement Account,especially, gets a lot of flake for this due to the yearly contribution limit. 

But what is the problem with being diluted if the rights-funded acquisition results in an increase in DPU?

In the end, it all boils down to the DPU.

To be clear, reits are leveraged investments and not all rights are for acquisition purposes. In the Great Financial Crisis of 2009, most rights were used to shore up the balance sheet and not for acquisition. Having a large chunk of reits as a percentage in retirement is quite risky.

I have complied the DPU of reits over the years. The DPU is based on date payable. The page can be found here.

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