With the global recession triggered by COVID-19, we have seen that the Singapore REITs index has suffered a massive 20% loss. You may be asking, “What would be the impact of COVID-19 on REITs? Is it a good time to buy REITs now?”

In this article, I want to help you understand three questions.

1. Why REITs were so popular?
2. Is it still worth buying REITs now?
3. What will be the future for the REITs industry?

You may have thought about these before, but I am sure this article will give you a new perspective.

The popularity of REITs is a by-product of Financial Repression

I have talked about the concept of “Financial Repression” a few times in my blog.

Investing in REITs was extremely popular in Singapore in recent years. This enthusiasm is understood. Many people stumbled upon investing in REITs a few years back and they have never lost money – yet! Moreover, Singapore REITs (S-REITs) have generally performed better than the Straits Times Index which is a general representation of Singapore’s stock market.

With the recent stock market crash, people who “missed the boat” last year are eager to buy or add more REITs into their investment portfolio. But they may not be aware of what they might be getting into.

Many REITs investors are not stock speculators. They are actually the moms and pops who just want to earn a decent retirement income. But contrary to many people’s beliefs, it is a myth that REITs are a “safe income paying bond alike” instrument.

And these types of myths will not end until you experience them for yourself. Just ask people who were faithfully investing in the STI ETF for the past 10 years of their miserable returns from index investing strategy; for property investors, ask those who bought before Asian Financial Crisis and the pain that they have suffered for the next 13 years.

Additional readings: STI ETF Investing: 3 myths busted.

Since we’ve lived through a decade in a low-interest-rate environment, not only retirees, but institutions, insurance companies and fund managers have piled money into the REITs market.

When the times were good, this was not a bad strategy. For example, in this article published in 2015, I was already advocating REITs as a source of retirement income. But good things do not last forever. The market runs in cycles, even though the people’s greed and fear do not change.

Since last year, I have written two articles warning income investors to take a fresh look at their portfolio in view of the risks of REITs investing.

Additional Reading: REITs Investing: Why you can still suffer a massive loss.

While speculators have made their fortune, savers have to pay the bill.

When I explained why the S&P 500 rally despite a looming recession, I mentioned that Wall Street can export the debit crisis out of the country. How? There are three stages of wealth reshuffling from the savers to the financial elites through a financial crisis.

1. Loose monetary policy leads to low-interest rates environment, force savers to invest.
2. Easy credit creates asset scarcity and pushes up asset prices.
3. Crises lead to asset price distress and then inflation helps write off debts as expenses of savers.

If you bought your REITs with your eyes open and you understood what you were getting into, it is fine. But how many people bought into Lehman brother’s minibonds thinking that they have a safe investment during the 2008 global financial crisis?

The sad thing is that the majority of people who were lured into such investments are not speculators. They were just savers who wanted to earn a bit more for their retirement. They weren’t investing to risk their life savings!

REITs did not become popular due to its income nature

Many people say that they bought REITs for income, but they are cheating themselves. In reality, they bought it for capital appreciation. We humans often jump to a conclusion and then find a way to justify it.

As you can see from the chart below, before the March crisis, Singapore REITs (the blue line) gained 45% over three years. At the same time, the STI index (the red line) was merely making 10% in total returns.

If you are new to investing, it is difficult for you to look at the chart without getting excited. And this kind of return is definitely not a norm of income investing.

When the COVID-19 crisis was just starting, I saw many news headlines encouraging investors to buy REITs. The subject line said things like:

• “Singapore REITs are a safe haven amid the global crisis”
• “Singapore Hospitality REITs stand to benefit from the budget”

And what has happened to Singapore REITs since then? Well, there were 18 REITs which lost more than 50% in a week during the sell down. Even the broad REITs market has lost 20%.

You may have been able to collect 5% in dividends, but years of your income have been wiped out in the past three months. I don’t think this is what you were signing up for.

The reality is that most REITs investors’ portfolios could be even worse than the broad market index because it is unlikely they owned all REITs and it’s further unlikely that they held them until today (Many have sold at a substantial loss due to fear or margin call).

But isn’t it a golden opportunity to buy now?

For people who were not previously invested in REITs, you may start to get excited about this opportunity.

Given what you have seen over the past few years, it is natural to have such a belief. Then my question is, “How much are you prepared to see your REITs portfolio go down? 10%? 20%?”

Let me show you the following chart of the FTSE Singapore REIT Index. During the global financial crisis (2008), Singapore REITs actually fell 70.56% from the peak!

Now, what do you say? I can’t tell you whether REITs are currently at the top or the bottom. But history shows us that we are far from a “once in a lifetime opportunity”.

Still, you might ask, “But, at the very least, aren’t REITs undervalued now?”

Let’s take a closer look at this. Your stockbroker or banker may have been sending you a list of stocks or REITs with a dividend yield of at least 6% and telling you that these counters are now undervalued.

First of all, the dividend yield is a very poor indicator of future returns. But for simplicity, let’s just use dividend yield.

If you think a 6% dividend yield is attractive, how about a 16% dividend yield (refer to the orange line below during the global financial crisis). You can observe the same phenomena for global REITs as well (represented by S&P Global REIT)

If we agree that we are experiencing a global crisis which is equal if not worse than the 2008 global financial crisis, I think we are far from talking about “undervalued”.

You don’t know what you don’t know

Besides financial repression (which I talked about earlier), the proliferation of REITs is due to relentless advertising by financial bloggers and course providers to interested DIY income portfolio investors. Very often, I hear people saying, “Why should I pay a fund manager or financial adviser a fee to manage my portfolio when I can just buy a portfolio of REITs and collect dividends myself?”

There seems to be this growing narrative in the social media that anyone can invest by themselves. While it is undeniable that a small group of people do have enough good financial knowledge to manage their own investments, you can’t expect everybody to do be able to do this by just reading up a few blog articles. The more you learn about investing, the more you realize that you don’t know.

People like to hear what they want to hear. They want to hear that investing is simple and they just have to do ABC and bang, they have the result. That is why many people bought some REITs just because they saw some people talk about it online.

REITs prices have probably reached a peak, even after the correction

When I talked about REITs investing more than 10 years ago, most people were not as enthusiastic as today. For those people who have been in the market for a while, you may know that at that time, the issues around investing in REITs were conflicts of interest between REITs sponsors and share dilution due to frequent rights issues. Even MAS admitted the regulations were not strong enough.

Fast forward to today, the REITs industry is much more regulated, but the issue is overpricing which I mentioned earlier.

For example, Keppel DC REIT is the only data centre REIT in the local market. But you can see that the share price has difficulty rising higher even though it is an obvious beneficiary of the pandemic.

It is not that these REITs are no good. The problem is that the asset bubble has ballooned to its near maximum.

REITs investing is not the same as property investing

Another reason that many people like to talk about REITs is that the business model is easy to understand and people associate it with physical property investing.

While there are many areas that REITs are more superior than physical property investment, these “advantages” work against REITs during a crisis – like the one we have now. The same regulations that gave a good reputation to the Singapore REITs industry in the past are killing it now.

For example, let’s say that you own two properties. One is fully paid for, and the other has a mortgage as an investment. Now, in this crisis, your tenants have suddenly “disappeared”. What will you do? As long as you still have a job, you can use your active income to pay for the mortgage instalment. Note that this is because you have other sources of income.

But it is not the same case for REITs. Let’s say you are the REITs owner and many tenants start defaulting their rents. But, you still have to pay for your loan and your staff salary. Although the government mandates that consumers can defer their loan repayment due to COVID-19 situation, the REITs owners do not have the same luck. Their creditors are not charities.

Do you have another source of income to pay these bills? If your only income is from rental, you have no other means to generate cash flow unless you borrow more money.

In the past, everybody was happy because you used to pay 90% to 100% of your income to unitholders. But now, there is little left in your account to get through this period.

If you understand these, you will understand why MAS issued new measures for REITs in April by:

• Allowing REITs to defer income distribution from 3 months to 12 months
• Allowing REITs to borrow more money by increasing the leverage limit from 45% to 50%

However, the government’s directive to protect the tenants has put undue pressure on the REITs managers. Traditionally, if a tenant was not able to pay their rent, the REIT landlord could just kick them out and still sue them for the remaining rent. But with the COVID-19 situation, things are very different.

Consider this, “If all your tenants are not paying their rents at the same time, what can you do?”

I mentioned in this article that the only way to get out of a debt crisis is to allow a systematic debt default and then write off the debts.

What is the future for Singapore REITs?

You need to understand that REITs are not a standalone investment. When you invest in REITs, you are actually investing in the future of the economy and betting the earnings from all the tenants. As a landlord, if one tenant cannot make money, you can find another tenant. But if all the tenants are closing down at the same time, what will happen to your investment?

When the Saudis started the oil price war, I thought the energy sector would be the first one to trigger the debt crisis. Interestingly, we have seen that the energy sector is more resilient than some others.

Contrary to many people’s beliefs, this is not a coronavirus pandemic, it is a global government lockdown pandemic. With the populists’ agenda and protectionism, the global economy has had an unnecessary stall. We have witnessed the bankruptcy of some large brands with a long history.

• Virgin airlines collapsed
• JCPenny department stores ended its 118 old history
• Hertz car rentals have just filed bankruptcy

In Singapore, the government is busy rescuing SIA, too. And there is no doubt many more bankruptcies of the familiar names are coming.

Then my question to you is: “What will happen if you are the landlord of these businesses? Where is the recourse for your loss of rental income?”

Even with the global economy slowly re-opening, things are no longer the same. We are rethinking how to push an elevator button, open a door, or greet a friend, not to mention going shopping and taking a holiday.

We have already seen how Hospitality REITs suffered. It is no longer just about the loss of earnings, but about survivorship. For example, Eagle Hospitality Trust (EHT) has already received a notice of default in April.

For Commercial (office) REITs, do you think companies have figured out a way to operate with much less real estate? Do you think companies will make more employees work at home? Companies have discovered that their workers can still function well with or without going to the office. Previously, there just wasn’t an external force to push this concept of remote working.

For Retail REITs, will we adjust the way we shop? Definitely. Will spending habits change? I think so. Some may say that the Retail REITs are moving into e-commerce nowadays, but then are you still in the REITs business?

Even before the crisis, many REITs were already struggling to pay their dividends and they had to issue debts to borrow money just to pay dividends (to make the unitholders happy). Will they still be able to borrow so freely in the future?

Let me summarize…

We all know that due to the COVID-19 situation, our food supply was interrupted. I recently took this picture from NTUC Fairprice.

The luncheon meat shelf used to be full. Unless you have tried all the brands, it was hard to tell which one was good. But it is easy to tell now. While some brands were completely sold out, some are still left on the shelf.

When the tide is gone, we will see who was swimming naked. – Warren Buffett

You can’t always use an old method to invest in the new economy. Humans will always find a way to adapt to the new world but not all the old businesses model can survive.

REITs have done well in the past decade due to the profound impact of long term low-interest rates and asset scarcity:

1. REITs could refinance their debt at a lower cost year-to-year.
2. REITs could borrow money to pay dividends even if their income could not keep up.
3. REITs demand was high as many income hungry investors were forced to invest.

These were ok during a good economic situation of low-interest rates, but the same success may no longer last.

I hope this article can help you have a better understanding of investing in REITs during the current economic climate.

Even if Singapore REITs had a glamorous past, it doesn’t mean the same success can be repeated in the near future. The recovery of Singapore’s REITs sector may be very choppy and it may not go back to the previous level anytime soon.

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