26 July 2014

Steps to Construct a REIT Portfolio

Most of the retail investors who focus on stock investment may confuse on REITs. REITs in simple words mean for unit trust which is focus on real estate investment for dividend yield play. It is suitable for investors whose risk appetite is medium to high. As most of the REITs in Singapore stock market yield 5% - 10%, so in long run, it gives you 2 - 3 times higher rate than saving rate in Singapore banks, and you may also benefit from rental increase and thus dividend payment increase in long run. This is the best case scenario. 

The worst case scenario is that you may suffer from stock price fluctuation like other counters listed in stock market plus a decrease in dividend payment. The reasons of dividend payment varies: 
  • The REIT is not doing enough hedging for oversea market, hence the payment translated to Singapore dollars maybe lesser if Singapore dollar stronger than local currencies received for dividend distribution
  • Credit Risk - A few REIT manager could not get the loan refinance. They were forced to liquidate certain assets in order to return back to the allowed debt level set by the authorities. In this case, they were forced to sell those non-liquid items (e.g. huge buildings) at lower price and they might agreed to stricter loan rule in order to get the refinance loan. The interest payment might increase and thus affect the net revenue received after the gross revenue deducts all operating expenses including interest payment. 
  • When economy activities is in down trend, lesser tenants would rent it for business expansion. It also might affect occupancy rates as well as bargaining power for REIT managers to increase the rental income. 
So, based on the various reasons, you may like to construct a REIT portfolio based on below criteria: 
  1. Diversify in different industries. You may like to buy REIT from various industries so that you will not be affected by single industry. My most favorite industry would be healthcare industries - First REIT & Parkway life REIT. Shopping mall REITs - Mapletree Commercial REIT (Vivo City), Frasers Centrepoint (Woodlands Causeway Point, Yishun North Point, Yew Tee Point etc), Capitamall REIT (Raffles City etc) etc. Industrial REITs - Sabana REIT, Mapletree Industrial REIT, ARA-CWT etc. 
  2. Put in bigger percentage in REITs that you most confidence with after your own homework. For example, I would like First REIT & Parkwaylife REIT to be in my top REITs in my portfolio as I am more confidence in their business model. 
  3. Regular Portfolio Rebalancing. Once you have set the asset allocation based on your own rule, you may perform regular review and then you can re-adjust the portfolio. This is to me a good practice so that you will not be affected mostly by any single industry. The risk you have now is solely on market risk. 
You may treat REIT as one of your component in your total portfolio. 

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