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Today, we are going to give our readers some pointers in making decision investing in REITs and caution some of the issues that most retail investors assume wrongly.

With Fed cutting rates somewhere this month, we could also expect the same goes to Bank Negara very soon. The rate cuts are in place all in the name of increasing the economic growth factor for US same goes for BNM’s reasoning for Malaysia.

When the overnight policy rate gets cut in Malaysia, this also meant that the money sitting in your fixed deposit account would be receiving less interest the next renewal. The people saving money and holding cash would face a difficult situation of possibly getting 3.5% on their 1-year fixed deposit.

Therefore, REITs would turn attractive to investors as they try to seek higher yields from regular fixed deposits. A common thing to do is to whip out a bunch of REITs and their dividend yield putting it in a table such as the one below.

At some point, we are looking at 8.64% yield from HEKTAR which is great or what many could say the rate is double of what fixed deposit pays. But is it? Let’s take a quick look on HEKTAR.

A Quick Analysis

The dividend (cent) had seen solid returns from 2009 – 2016. The decline started in 2017 followed by one of the worst in 2018. This year, it is still a big question mark on the payout that’s coming. But if we took the easy way of multiplying 1.93 cents with 4 quarters, we obtain 7.72 cents which is even lower than what it was in 2018.

A quick visit to the charts would tell us how the share price moved and how closely correlated it is with the dividend payout.

Clearly, the share price dips back to RM1.00 when the payout started to drop in 2017. Stabilized again in 2018 and saw a reversal once again when the Q1 2019 dividend payout were announced. The market expectation on getting a 9.01 cents dividend payout seems to be disappearing for 2019 and share price do reflect on it.

Going back to yields, the question is “an 8.64% yield for 2019 for HEKTAR is possible?”. Obviously, it’s not!

A historical reference on dividend payout doesn’t reflect the future yield that one would obtain. Moreover, the actual yield on the REIT you get may totally be off from the one received by your friend with a mere difference in 1 single cent.

This is why we always urge retail investors to be careful not to blindly select the one that shows the biggest yield number from the table. If it was that easy then we would all be out of jobs.

More Factors to Consider

The research work that needs to put in place understanding a REIT is almost similar to understanding other sectors such as manufacturing. When a REIT gain/drop in price, one has to look out for/understand what is happening with key points such as:-

1. Is a part of the building closed for refurbishment?

This would automatically assume that a revenue stream would be lost

2. Has an anchor tenant left the building?

For some office REITs, the anchor tenant leaving could create a domino effect on the attractiveness of the property.

3. Is there an acquisition coming or a disposal just happened?

Usually an acquisition would mean that profit made would be utilized and payouts will decrease while a disposal would mean that a large dividend payout just happened thus increasing yield.

4. Had the industry prospect changed?

Industrial or logistic related REITs such as warehouses would see ups and down based on the demand for these types of buildings.

5. Interest rates?

Yes. Even the bank’s interest rates would be affecting how these REITs perform. A lot of REITs use debt as their financing option for their properties and when the rates go down, financing cost literally could be lowered.

But when the rates are up! Preference to REITs would decline couple that with the rising cost of financing. A double problem for attractiveness!

Another Common Misconception

A 3% yield on dividend doesn’t equal a 3% gain from fixed deposit. Most common and we still see this looming in many retail investors when they are considering a high dividend yield company. Let’s illustrate!

Fixed Deposit

Simple to understand where assuming principal was RM1,000 + 3% = RM 1,030 in one year! Free Dinner!

Dividends

Assume you bought the share at RM1.00 and the dividends per year are RM0.01 per quarter. Another assumption we have to make would be share price not moving as we are comparing with fixed deposit which didn’t change for its initial principal.

Due to share price being adjusted when dividends are paid out, the returns paid out aren’t giving you extra cash but merely giving you back the money that you’ve placed earlier. A very big contrast with receiving interest from fixed deposit.

When the share price goes up or down we either gain or loss but when the share price doesn’t move a year, we are actually wasting the yield we could have generated from placing fixed deposition

Conclusion

1. We caution retail investors not to assume REITs as a replacement for fixed deposits.
2. The yield recorded were last year’s not this year
3. REITs require proper understanding similar to other counters on Bursa
4. Might as well do a proper research on a potential growth company
5. Money sitting in REIT takes too long to grow
6. It is a long-term investment (like 5 – 10 years) only you would see the appreciation in value