Is It A Good Time To Go Into REITs?

With cuts to the interest rates happening, many investors expected that real estate investment trusts (REITs) would see their heydays coming again, after being in the doldrums for much of the past two to three years. Alas, this was not to be. In fact, if you look back even further, Singapore REITs (S-REITs) have yet recovered to its pre-COVID levels, according to the iEdge S-REIT Index (Figure 1).

 

Fig.1: 5-year iEdge S-REIT Index (Source: SGX as of 23 Nov 2024)

By now, if you had noticed that the title of this blog post sounded familiar, you are correct. I had asked (more or less) the same question back on 30 Aug this year, and it is kind of a déjà vu asking it again. If things are on a bargain for quite some time, it does not bode well as their values are seen as stuck without any potential for price appreciation. Or is it?

On a macro scale, several factors contribute to this wave of S-REITs downtrend, but for me I see the two main ones are the incoming U.S. president’s geopolitical and economic policies which are viewed as inflationary in nature (and thus bringing back higher rates, a bust for REITs), and the continued narrative of falling distributions of past quarters. Therefore on the whole, the REITs asset class was dragged down by these concerns, whether will they come to fruition or not.

In addition, as I had mentioned here before, the effects of a lowered interest rate would not be felt immediately but rather at least a couple of years, so there is some “interest pain” felt in the form of costs of borrowing during this phase.

Now back to the question: is it a good time to go into S-REITs?

As usual for my answer, it depends.

Since in general the S-REITs were dragged down as a whole, including those that are deemed fundamentally good ones, which includes having low gearing, resiliency of their properties and potential for higher rental reversions, to name a few. If you are not able to identify which REITs to go for, or going after individual ones is not your penchant, then going for or averaging down on REIT exchange traded funds (ETFs) is another way.

While in general the markets are rising (equities, gold, and yes, Bitcoin) thanks to whom we know will be the next U.S. president, there are still opportunities in other asset classes (like REITs), sectors and industries that are facing a setback. These are the Mondays to look out for to buy in (intelligently, of course), and they would eventually become Sundays again in due time.

Simple Mathematics To Know For Investing

Mathematics, or math/maths, depending on which part of the world you came from, is a subject which almost all of us had encountered in school, and somehow developed into a sort of love-hate relationship with it. However, like it or not, maths (I shall use this short form for this post) is inescapable from our daily lives, such as calculating how much change to get back for a $3.50 meal with a $10 note, and whether two six-inch pizzas are equal to a 12-inch one, etc.

For investing, I shall present two maths concepts to better your knowledge.

 

(Picture credit: athree23 from pixabay.com)

 

#1: Compounding

The famous physicist Albert Einstein once quoted that compounding is the eighth wonder of the world. Yet, several people did not know that there is a second part to the quote, which is “he who understands it, earns it…he who doesn’t…pays it”.

Let us understand the basics of compounding. Supposedly, you deposit $1000 in a financial instrument that pays you a 5% returns every year. After one year, you would have a total of $1050 ($1000 + (5% of $1000 = $50)). After the second year, you will get $1102.50 ($1050 + (5% of $1050 = $52.50)), and so on. For any given number of years (n), the compounding formula is:

P + (1 + r) ⁿ, where P is the principal (the initial $1000), r is the returns (5%) and n is the number of years.

The above illustration fits into the “he who understands it, earns it” narrative, but compounding also has a dark side to it, which is the “he who doesn’t…pays it” part. How so?

Instead of returns on the r, replace it with the bank interest charges that you need to pay for a loan, or the annual inflation rate. Imagine taking out a loan that has double digit interest rate, or the value of your $1000 today becoming $995 next year.

Hence, there are two lessons to be derived here; one is to avoid high interest-bearing loans, and the other is to invest your monies with decent returns instead of keeping it and getting eaten by inflation.

 

#2: Percentage Gain And Loss

I came across a maths scenario that goes like this:

I had lost 50% this year, so I need to gain 50% back to make it even.

If you remove the “%” behind, yes that is correct, but in a percentage, it is based on something and not an absolute value in itself. Using the scenario mentioned, I had lost 50% of $1000 which is a $500 loss and that means I have $500 left. Making it back 50% of what I had left (50% of $500 = $250) is only $500 + $250 = $750, and I still have a shortfall of $250 to the original $1000.

For percentages, the formula requires two values: the initial and the final. Thus, percentage change is:

(Final value – Initial value) / Initial value x 100%

So, to go back to $1000 from $500, the actual required percentage gain would be:

($1000 - $500) / $500 x 100% = 100%

Putting in perspective, here are the percentage losses and the actual required percentage gains to break even:

Percentage Loss	Actual Percentage Gain to Breakeven
10%	11%
20%	25%
30%	43%
40%	67%
50%	100%
60%	150%
70%	233%
80%	400%
90%	900%

 

After looking at the table, some of you may feel daunted by the prospect of losses and the subsequent larger jump to return. For a share price drop of say, 30%, 43% is needed to go back to breakeven, and some viewed a 43% jump is a tall order.

But there are numerous examples of prices that recovered, and then eventually surpassed the original price. This is true for counters that have strong fundamentals, whose prices were, to say the least, temporarily crashed due to bad news that could possibly be affecting only for a short term, and this presented a good opportunity to average down and load up.

Where Did You Get The Capital From?

During an investment discussion, one of my acquaintances had asked an interesting question, which is:

“You have been updating about which counter you had bought into, and you seldom sell any. Where did you get the capital from?”

Picture generated by Meta AI

Here are the capital sources:

Capital Source #1: Cash Injections

If you had read the makeup of The Bedokian Portfolio, there is a small portion (earmarked 5% for our case) dedicated to cash. This amount is purely used for investing, and it is not mingled with our normal savings and emergency funds. This is the major capital source especially for our portfolio build with disposal income.

So, what are the tributaries contributing to this cash portion?  On a regular basis there are two: from the portfolio itself (dividends from equities, distributions from real estate investment trusts, coupons from bonds and interest from cash in banks) and monthly contributions from our salaries. This is typical for most people who have an investment plan and portfolio in place. 

As the portfolio grows over time thanks to capital gains and compounding, so does the yield amount, which is fed into the cash part. A 5% cash yield on a $10,000 portfolio is $500, but a 5% cash yield on a $100,000 one is $5,000, and $5,000 could purchase more securities than $500. Add this to your regular contribution, which may have increased thanks to rise in salaries, you would have a larger cash pool to invest with.

There are further exceptions unique to us, such as liquidating our past investment-linked plans, endowment funds and a matured child education endowment policy, and they greatly increased our cash injections.

Capital Source #2: CPF-OA And SRS

The next capital source for us is our CPF, specifically the CPF Ordinary Account (CPF-OA). Since we had finished our mortgage payments and had hit our prevailing Full Retirement Sum, the door for investing the CPF-OA had opened. The main aim of investing in CPF-OA is to have better returns than the current 2.5% rate, though with some added risk. The use of CPF-OA as a capital source comes with limitations, such as the choice of securities and the amount used.

35% of the investible CPF-OA savings can be used for individual local securities and selected exchange traded funds (known as the “35% stock limit”), and a larger amount is allowed for professionally managed products. We invested using funds from these two sub-pools in the CPF-OA, though not to the limit, giving us some spare capital for future allocation.

For our SRS, though miniscule as compared to our CPF, it is still a source of capital that can be deployed, if necessary, though for now it is used on a robo-advisory portfolio.

Conclusion

My acquaintance was a bit surprised and felt “awakened” by the answer, because it is obvious yet hidden in plain sight. I am glad that he had learnt something new, and I hope you had some takeaways, too.

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Alphabet And Apple: Latest Quarterly Results

The past week had seen some notable technology companies reporting their quarterly earnings. For this post, I will look at the two holdings which I had declared must-haves for an investor who is venturing into the United States (U.S.) market for the first time, and we will see if this trend continues to be so.

Apple MacBook showing Google website (Picture credit: Firmbee from pixabay.com)

Alphabet

On 29 Oct 2024, Alphabet had announced stellar third-quarter earnings, with earnings per share (EPS) and revenue beating estimates by 14.6% (US$2.12 vs US$1.85) and 2.3% (US$88.27 bn vs US$86.30 bn) respectively. Overall, revenue increased by around 15% year-on-year (YOY), with the Cloud segment revenue jumped nearly 35% YOY. Other major segments such as Search Advertising, YouTube and Google Play increased 12%, 12% and 28% YOY, respectively.

The share price jumped to above US$180 before settling at US$172.65 by the week ending 1 Nov 2024. This represented a year-to-date (YTD) performance of +22.51%.

Apple

Apple announced their fourth-quarter earnings on 31 Oct 2024, with EPS and revenue beating estimates by 2.5% (US$1.64 adjusted vs US$1.60 estimated) and 0.4% (US$94.93 bn vs US$94.58 bn estimated) respectively. Services and iPhone revenue streams improved 16% and 3% YOY respectively, but the overall revenue reduced by 1% YOY, which was dragged down by MacBook (-34% YOY), iPad (-10% YOY) and Wearables (-3% YOY).

Apple’s share price dropped from the US$233-ish to US$222-ish, but YTD is still profitable at +15.78% by the end of 1 Nov 2024.

The Bedokian’s Take

Both companies share common characteristics with each other (besides sharing the same first letter): Both are part of the Magnificent 7 that saw huge growth over the past couple of years; both are leveraging on the rising trend of AI (artificial intelligence or Apple Intelligence) in their products and/or services; and both are magnets of suits from regulatory authorities worldwide and targets of policies in the current geopolitical landscape. These in my opinion are the make or slight break for Alphabet and Apple.

Valuation wise, Alphabet seems to be “cheaper” than Apple in terms of the Price-to-Earnings (PE) ratio. As of 1 Nov 2024, Alphabet’s PE ratio was at 22.9, lower than Apple’s 36.6, and the current S&P500 PE, which is to be seen as the “average”, was standing at 29.2. 

Though financially, the two are fundamentally strong in their balance sheets and free cash flow, the main concern for Apple is that it is facing a decelerating revenue growth. This would impact its valuation and subsequently may cause a downward pressure on its share price. Still, based on the latest number of active Apple devices worldwide, it climbed from 1.5 billion in 2020 to 2.2 billion in 2023¹, demonstrating its wide moat effect. As for Alphabet, it still holds market leading services like YouTube and search advertising, so the moat is relatively safe.

With the companies’ resiliency shown in their moat status, I still opine that they are good to go, though circumstantially for my case I would view it as an average up. A thorough fundamental analysis is still required on your end should you want to enter them for the first time.

Disclosure

Bedokian’s average price for Alphabet (US$131.43) and Apple (US$93.07) based on US$/S$ exchange rate of 1.32.

Disclaimer

1 – Laricchia, Federica. Number of Apple’s active devices in selected years from 2016 to 2023. Statista. 19 May 2023. https://www.statista.com/statistics/1383887/number-of-apple-active-devices/ (accessed 2 Nov 2024)