09 February, 2019

Why I hardly invest in Reits

Reits are popular in Singapore. And there is nothing wrong owning some of them.
I personally have not held any Reits for a while (mostly due to point 2 & 3 below). This does not mean that I am not currently looking out for them because I see no harm holding a small substantial amount to diversify.

Below are the reasons why I minimize holding Reits:
  1. It is better to have Reits when we have large capital to capitalize on the given yield. 5% yield on $4000 is mediocre but 5% yield on $40,000 is something. In other words, I feel Reits suit the rich more.
  2. Reits tend to move slow in prices (same for Trusts). Yes, this means they have less speculative movements. However, I am still quite young and able to take more risks by building more cash from price appreciations. Instead of gaining about 5% yield , there are so many better risks-rewards out there to grow our money. 
  3. Most of us should know by now, Reits are exempted from taxation as long as they distribute at least 90% of their revenue to shareholders. This explains why their yield are generally attractive. What is expected to happen during down times (declining net profits) in order for Reits to maintain the same payout per share?
  4. Most Reits move with the economy unless we are talking about more defensive Reits like Parkway Life. If we really want to go long term in Reits, I feel it will be worth waiting for the next cyclical downturn. 
  5. Most Reits are heavily in debt and some even have debts higher than 40% of their net worth. 
In my own opinion, anyone thinking to go "All-In" on reits without diversifying should probably think twice.

Thanks for reading,
and Happy Chinese New Year, folks!


  1. Please back up the last portion with facts and data pls.

    1. Some of the bloggers have them tabulated in a nice table. Can just Google reit gearing ratio.

  2. Could you explain heavily in debt for the last portion?

    1. Hi Devil's advocate ,

      Thanks for asking. I have rephrased my post to make it clearer now.

      As an example, Starhill reit has debts which is 57% % of its current net worth (equity). it is also known as the debt to equity ratio. if you look at other reits ,most of them have similar level for the same ratio.

    2. Interesting how you look at it. Normally reits are judged by their gearing which is debt/total assets. MAS cap the gearing ratio at 45percent.

    3. Hi HRI,

      Thanks for adding on the 45% :)
      I am aware of the gearing measure used on Reits.
      Believed you have your reasons in amassing Reits and there is really nothing wrong with that. Personally, it is not point 5 that bothers me most but point 2 & 3 ;)

    4. Nah, not trying to convince you how good REIT is, just curious on the way you view gearing. If you look at capitaland, it's debt over equity is also more than 50percent. It's normal even for a blue chip.

      One man's meat is another man's poison. Your point 2 is why I decided on reits actually. I've tried growth stocks initially but didn't work for me , perhaps I was definitely lacking in the stock analysis department! Haha. Anyway doesn't matter growth or dividend as long as the pot of gold is there at the end of the rainbow.

    5. Haha I am not too well versed in Reits too.

      Yes, as long as it makes us $$$!

  3. Hi Frowns,

    Though I am the same age as you, I consider REITs to be an anchor of my portfolio for dividends. I personally believe that bonds are unsuitable for our age range, and regard REITs as a substitute, though of course quality matters. I consider it as the low volatility portion of my portfolio which balances out against the growth portion.

    As for the issue that Devil's Advocate has pointed out, I believe that there is a misunderstanding as gearing levels for REITs are usually measured in terms of debt-to-assets, instead of debt-to-equity since the bulk of their assets consist of tangible real estate. Consider a mortgage on a personal home. Banks and MAS usually quote limits in terms of Loan-To-Value, which is the size of your loan against the property value, instead of your equity portion. The statutory limit for Debt-to-assets as prescribed by MAS for REITs is 45%.

    Reality Inversion

    1. Hi Prometheus,

      Agreed, bonds are almost out of the question for our age unless we talk about "risk-free" SSB.
      As mentioned, the gearing portion falls under point 5 and it is not particularly my main concern not holding Reits.

      How many % are you in Reits? :D

      Personally, I do not like the idea of restricting capital growth to Reits. It is almost impossible to get multibaggers from Reits even from Ipo. I prefer stocks with less limited upsides.

  4. I support you on this post since you are still young. :-)

  5. Starhill Reit is roughly 35% gearing now. For S'pore listed Reits, max gearing by regulation is 45%. Highest currently is Soilbuild Reit and IREIT Global, both at around 40% gearing.

    At this point in the economic cycle, I think most should not have more than 60% or 70% in risk assets like stocks or reits. Unless you're very nimble or have iron stomachs.

    Markets can still go up say 20% or 30% to the top, but the drops & downturns will be fast & furious like in Oct for S'pore stocks or Dec for US stocks. What we saw last year is just a mickey mouse appetiser of what can happen e.g. -50% drop within 3-4 months.

    Most people don't have the stomach or psychology to hold thru -50% drop in their networth.

    Even if just 60% in stocks / reits, you're looking at overall -30% drop in your portfolio. I know ALL my younger friends & colleagues will be super shocked & depressed if this happened to them. Only those older seasoned people who have gone thru at least 1 or 2 major recessions can cope a little bit better.

    Don't forget also --- during recessions & bear markets, most Reits will not be able to borrow or roll over debts easily (credit crunch). They will come to the market to issue LARGE rights issues. If you hold reits, you need to be prepared to have cash to subscribe to the rights issues, otherwise you will be MASSIVELY diluted. This is what happened in 2008/2009.

    1. Hi,

      Nice insights. Indeed, recessions are scary and one of my worst fears too. I agree with you that it is not advisable to hold more than 60% of our cash in stocks at the moment, that will be some crazy thing to do unless that person is filthy rich lol.

  6. How about 5% on $400,000? :)

    1. If it is $400k, I see no harm going long on Reits!