M-REIT double digit price drop: Should we bail or keep our cool?

It is hard, if not impossible, to find an investor who has not lost a single cent in his investing journey.

Obviously, if we have not used any money that we cannot afford to lose then we can be quite philosophical about these losses. However, if we do not want to be philosophical, we need to strategise our next move, just like in a battle of chess.

Choice #1

Set a stop loss, say 10%. Sell any positions which have depreciated by 10% or more. This would mean believing that either the income producing investment is no longer able to produce the income that it has been producing or its fundamentals have deteriorated.

Choice #2

Stay invested and perhaps buy more to average down total holding costs. This would mean believing that the income producing investment is still a viable income generating asset or will even perform better in the future.

Investors thought the dip in M-REITs was bad enough when I wrote my August 2013 article here. By the end of August, most REITs suffered double digit drops in their prices.

In times of adversity like this, it is worth to re-look into the fundamentals of what we are invested in, and use common sense to make a decision on whether to sell, hold or buy more.

Emotions always overrule logic in times where fear is rampant in the market. If we let fear manifest, we may act irrationally – so it is crucial to differentiate noises from hard facts. And it really adds more oil to the fire when you have news headlines like - “M-REITs are losing their lustre as [insert reasons here]”.

My article this month aims to “calm” REIT investors, including myself, by using facts and common sense. Don’t worry, one does not need to have any CFA, CFP or MBA credentials to understand this. For this, I did a short interview with Dato’ Stewart LaBrooy, CEO of Axis REIT Manager Bhd and chairman of the Malaysian REIT Managers Association (MRMA). I asked Dato’ if it makes sense for retail investors to take such news at face value.

“Now we all know that REITs are equities that behave like bonds,” remarks LaBrooy, commenting on how, like bonds, REITS are obligated to provide dividends. “However the one thing that differentiates a REIT from a bond is that a REIT is asset backed and a bond isn’t.” Indeed, for a REIT, you own a piece of these real estate assets, while for a bond, you are a lender rather than an owner in the organisation which issues the bonds.

Furthermore, yields are  higher for REITs than for Malaysian Government Security (MGS) bonds. And while government bonds are denominated in currency which tend to erode in value due to inflation, values of property in the long run tend to appreciate over time, even indexed against inflation.  

Dato’ Stewart LaBrooy, CEO of Axis REIT Manager Bhd and chairman of the Malaysian REIT Managers Association (MRMA).

A diligent REIT Manager should also have, over the 10-year period, grown the fund and its dividend yield thereby raising its share price, says La Brooy.

So in his opinion, a major drop in REIT prices means a good time for investors to look at reentering the market.

Then there is another type of news that has unnerved investors, the likes of Sunway REIT Q4 net profit lower, where it states the net profit of the REIT has been on a downtrend compared to the previous financial year. Instead of looking at net trust income, investors should look at net property (rental)  income as it is a truer reflection of the performance of the portfolio, says La Brooy.

Of course, investors should also look at the expenditure of the REIT, says La Brooy: Is it rising year on year ? It shows that the REIT manager is having difficulty maintaining efficient expenditure on the portfolio.

Bricks and mortar

Additionally, investing in REITs is as close to investing in real estate as is possible for small retail investors who may not own whole buildings or entire units in a building. If values in a REIT fall drastically, does this mean the values of the properties in the REIT plummet too? If the answer is “no”, then, there you see the value in the real estate here.

As institutional investors are moving out their money elsewhere (likely into bonds now that their yields have risen), Mr Market is going to offer M-REITs at lower and lower prices. This means that distribution yields would also go higher and higher, given lower prices.

Now it is your call. Just don’t let overanalysis lead to paralysis.

Lieu Ching Foo is the founder of Malaysian personal finance blog http://HowToFinanceMoney.com, the co-founder of REITMethod.com and an advisor with financial advisory firm Fin Freedom.



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