M REIT sector price drop – are we asking ourselves the right questions?

(Last Updated On: 26/01/2014)

Are M-REIT bad investments now? Should an investor long in REIT liquidate their positions now given that the unit prices of M-REITs have retreated some 10% plus from their highs or should an investor accumulate slowly? Why is there a sell down on M-REIT, especially the retail REITs? I have come to expect such questions from members and non-members of my REITMethod.com program. However, panicking and selling when prices plunge to a low isn’t going to help make things better, or is it?  In the excerpt of the REITMethod webinar below (on July 2013), I hope you will understand the rationale I used to come to a decision – which is neither right nor wrong.

In times of extreme market volatility, especially if it’s a downside, an investor has to decide for himself. Everything else is just noises because it is your own money at stake here. Before he can decide for himself, he has to understand his motivations for being invested in REIT in the first instance.

If his motivation was for income, then, ask if  the REITs under his portfolio still do a good job of providing regular income. If his motivation was for capital gain, then, he should have set a target and perhaps sold his investments when prices declined by 10% from the top, for example.

People get confused when they don’t know what they want.

It is difficult, if not impossible, to find an investor in this world who has not lost any money in investing. If we have not used any money that we cannot afford to lose in our investments, then, we can be more philosophical about the losses. However, if we do not want to be philosophical, we have to think of our options.

Option 1
We could cut our losses. Sell. This would mean believing that either the income producing investment is no longer able to produce the income that it has been producing or the market price of the investment is going to decline even more significantly in future.

Option 2
Have conviction, stay invested and perhaps buy more to average down our holding costs. This would mean believing that the income producing investment is still able to produce the income that it has been producing or even more. It could also mean believing that the market price of the investment has stabilized or could even appreciate.

For me, my remaining investment in M-REITs is for income. And by that, the fundamentals must be strong, so that the regular income will not be affected negatively, at least not in the next few quarters.

real estate reitInvesting in REITs is as close to investing in real estate as is possible for small retail investors. We might not own whole buildings or entire units in a building, nonetheless, we have to employ a real estate investor’s mentality when investing in REITs.

Like any other investments, could we see values plummeting to zero in properties? That simply means, when there is no demand for real estate. 

If the answer is “no”, then, there will always be value in real estate here.

Of course, Mr. Market does not care what I think. This is a good thing. As Mr. Market goes into a manic depression, he is going to offer M-REITs at lower and lower prices. This means distribution yields will go higher and higher, everything else remaining equal.

Could we see M-REITs trading below NAVs once again? I have no idea. If it should happen, we would have a chance to buy productive real estate at a discount once again. 

As M-REITs’ unit prices climbed higher, we should be careful and not be too optimistic. Now, as M-REITs’ unit prices decline, I will suggest everyone not to be too pessimistic.

Always ask the right questions and we will know what to do.

 I thought long and hard on how to write this blog post in as neutral a tone as possible but at the same time making sure it is not a some useless philosophical crap.

This post was inspired and adapted by AK71 from the Blog – A Singaporean Stock Investor on S-REITs.

This Post Has 6 Comments

  1. 1. Nontaxable income refers to income that is not subjected to the normal withholding tax because it has been franked as capital allowances or tax exempt income.
    2. Can you give an example?
    3. Yes
    4. It is already deducted before they send you the cheque or bank into your bank account via e dividend

  2. Hi, would appreciate if you can clarify/explain on the following:
    1. I saw announcement like ‘Final income distribution of 2.02 sen per unit (of which 0.68
    per unit is taxable and 1.34 sen per unit is non taxable). The taxable here refers to corporate income tax?
    2. Some announcement did not mention taxable or non taxable. So it is safe to assume they are not taxable?
    3. But REIT is not subject to corporate income tax if they distribute at least 90% of their income right?
    4. REIT’s dividend is subject to 10% withholding tax. So in 1, I need to minus 10% withholding tax to arrive at the net dividend?
    Thanks a lot.

  3. Perfect for retirees, or on a permanent sabbatical, absolutely KS 🙂

  4. Agreed Lai! You’ve been there, done that since 2005 🙂

  5. According to my observation, some REITs are overpriced against its Net Asset Value (NAV). Therefore, the adjustment of these overpriced REITs is only matter of time.

    If a REIT is priced below its NAV, you are actually getting a bargain price due to the underevaluation by the market. But, over the other side of the coin, if it is priced very much higher than its NAV, you may take this opportunity to clear your position or at least to recover your investment capital first before you lose the opportunity.

  6. My primary aim for REIT investing is for their distributions. Secondary aim is capital gain which I have benefitted during the recent spike in their price. Having taken profit, now that the prices is coming down, it’s time to reinvest again.

    I will only review my REIT investing only if it is very clear that their distribution trends are tapering off or their properties have lost market appeal which causes further price reductions. Till then, I am happy to receive my quarterly / semi-annual distributions from the REITs.

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