Asked on 06 Apr 2019
My current portfolio consists of SSBs, and monthly RSPs into Nikko STI ETF and Stashaway. The goal is to build a long-term portfolio that will help me to generate passive income in the long run. Was considering making small investments into Lion-Phillip SREIT ETF, to monitor the market and learn more, before eventually buying into the REITs itself, and then diversifying globally. Is this a sound strategy?
Most better learned folks will recommend buying into the REITs etf.
Personally I am not fond or up for it, because it has a mix of the good and not so good reits.
If you are able to choose the "better" reits, I would say doing DIY is better with more upside, and less downside. The issue is then how do you know which is a better reit?
I have done my own set of criterias in other posts, but the most important one I have come to use is the GTI score on SGX stockfacts / screener. If the GTI score is less than 70, I totally ignore that stock / reit.
Why is GTI important? Reits that score well in GTI tend to
1) announce the upcoming acquisitions and divestments before they proceed to execute. The "bad" ones tend to announce after the fact, and some of those could be related party or interested persons transactions.
2) have regular meetings, and through this tend to be more aware of their risks and position, so they tend to manage their performance and they generally don't derail so much and suddenly give a poor P&L / distribution for the year. "Managing results" isnt a bad term in this case, think more along like this bad event happened, so we need to cut costs / do events / help generate more retail sales for tenants so that they can still deliver what they promised.
The other important factors are:
A) decent debt-equity or gearing ratio. If the debt-equity or gearing is too high, the reits would need to do rights issue generally as they can't borrow anymore. The worse the debt-equity ratio is, generally the more unfavourable terms for the rights issue, and a general fall in the share price.
B) decent profit margin / roe / yield level. I think most good reits end up priced by market at around 5-6% yield, adjusted for their industry, eg so far parkway life usually comes under 5%, but they operate in hospitals n nursing homes that tend to be more stable. In some of these cases, 4+% yield is acceptable given the nature of industry.
By the way, not all rights issue are bad. Some become an opportunity to buy into the good reit at discount. The key thing would be if dpu and nav increase on the post rights issue than before, and is generally yield accretive, then its good. Those that dilute the yield need to be discussed.
These are my two cents. Doing homework is always good. Hope this helps.
P.s.: I am also investing in stocks and reits to generate passive income. Either thinking of it as backup income in bad times / retrenchment, or using it to generate cash to put into my srs / rstu for tax relief in good times.
I think best way: to stay with the ETF only
I think that exploring the opportunities of the 3 existing REITs ETF can potentially be a good educational journey for youself, if you are looking to gain some exposure into REITs and learn more about the industry and asset class.
However, there are definitely some things to take note of! I think that most of the S-REITs ETFs are new (Lion Philip 30 Oct 2017, NikkoAM 29 March 2017, Philip SGX 20 Oct 2016).
On top of these factors, you should definitely employ some fundamental analysis to the REIT sectors that these ETFs are invested in. These should include, but not be exhaustive:
Just to add on, it is crucial to conduct your typical investment analysis in selecting REITs. Some factors include:
Leverage (Gearing ratios)
Composition of REIT sectors covered and Industries covered
DIvidend payout frequency
Nonetheless, REITs are a good opportunity for those who are looking to increase their dividend income.
If you really believe in a long term portfolio you wouldn't be trying to increase your passive income in the short term.
You want to set a goal and invest aggressively till that goal is hit, before switching to a dividend paying instrument.
Ideally, you want the transitions and choices to be fluid and free, which I can help with.