Investing in Property: Property Shares

Now that the government has clamped down on buying and selling of property, perhaps it is time to look at other ways you can invest in property. One of these ways is to buy shares of companies that deal with property, whether as developer, contractor or owner-manager. Some such counters are Capitaland (developer), Ho Bee (developer), Wee Hur (developer, contractor), Suntec REIT (owner-manager).

There are differences when it comes to different counters, even within the same category. For example, Capitaland operates in various countries while CDL is predominantly in Singapore. Suntec REIT mainly does commercial property together with the namesake Suntec City Mall, while Cambridge Industrial Trust owns industrial property, which has very different profiles.

Before I start talking about how I analyse these companies, I’d first like to say that investing methodology is as varied as they come, and while there may be similarities, hardly anybody uses the exact same metrics, and what works for me may not work for everybody. Secondly, I am not a qualified financial advisor, and in any case, you should do your own research and never take someone else’s advice wholesale. After all, it’s your money.

Looking for a property counter
There are several ways I use to find counters to invest in, depending on what the trigger is. For example, if I am bullish on the property market, typically I do a zoom-in approach, starting with countries that the companies operate in, zooming into the sector they are in, further zooming into tier or type of property they deal with, before narrowing down into their financial statements. If there’s a particular counter I am interested in, then typically I do the reverse, digging into the financial statements first before zooming out.

What to look out for in the financial statements
Last Sunday (17 Mar 2013), The Sunday Times had an article talking about what to look out for in the annual report. While I don’t think it’s exhaustive, it definitely gives a good overview of the important parts to notice. Please give it a read if you can. For property companies, here are the things I look out most for, after first determining that they are operationally profitable:

Developers: NAV and RNAV
I look out for the value of a developer in 2 main aspects. The first is the profit it can generate from sales (or progressive recognition of sales), and the second is the value of the land bank. While both are important, it really depends on your time frame. In the short term, profits are more important while in the longer term, the value of the land bank will determine how sustainable the profits is. As such, I usually view the latter as more important.

Contractors: Committed contracts
Similar to the argument above for developers, I rather look at what projects contractors have in their pipeline to determine the sustainability of profits.

REITs: Cashflow
REITs are a little bit different from developers and contractors in that the most important aspect is really cashflow. As an investor, I treat REITs (or any type of business trust) as a stream of income. As long as the cashflow remains strong, and the distributions keep coming, I don’t care as much about profits. A case in point is Starhub. Even though it is a telecommunications company, it actually behaves more like a business trust. Month on month it may turn in a loss, but quarter on quarter, they continue to pay out good dividends. The reason is that even though they may make a loss, the loss is actually from depreciation of their fixed assets like their cables or fiber optics, and not from operations. Similarly, a REIT may book a loss due to downward revaluation of their assets or depreciation of lease etc, but the lease business itself may be healthy.

What to look out for in the macro-environment
The success of the property company is dependent on what happens in the economies they operate in. Therefore, I always try to read the newspapers and keep up with current affairs. Politics, economics, commentaries etc are important pieces of information for any investor. Here’s a quick list of what I look out for in the news:

1. Government policies
2. Openness of government to foreign investors
3. Commodity prices movement
4. Property market sentiment
5. Rental market sentiment
6. Interest rates movement

Finally, I’d like to remind everyone that investing is a risky business, and while you can try to minimise your risk by knowing more about what you are buying into, no amount of research can guarantee that you will make a profit. That said, good luck!! Huat ah!!

5 thoughts on “Investing in Property: Property Shares

    1. Thanks for reading. I wouldn’t say there’s no risk. There’s ALWAYS risk. However, given that in Singapore, REITs are limited in the amount of leverage they can take, risk of default is typically rather low. The main risk for REITs in my opinion is that interest rates go up, increasing their interest burden and reducing their cashflow. The second major risk is that the rental market weakens and rent received reduces, threatening the cashflow.

    1. Hi Jack, thanks for reading. An increase in interest rate does not make a REIT unattractive per se. When I look at a REIT as an investment, I look at the yield it gives me, as well as the sustainability of that yield. As long as the yield makes sense, a REIT is attractive to me. The risk I mentioned in the previous comment was that an increase in interest rates may increase the debt burden and thereby reduce the cash available for distributions, which then reduces my yield. The point at which this makes the REIT unattractive is really subjective. At the moment, I am using 4.5% pa as the benchmark.

    2. Oh, by the way, I calculate yield using the distribution amount over the higher of my cost and the current price. I think it’s important to keep it in perspective and to reassess the attractiveness of the REIT periodically. For example, if you bought the REIT at $1, distributing $0.05 a year, you start off at 5% yield. If subsequently, the price went up for whatever reason to $2, but the distribution stayed at $0.05, the yield would drop to only 2.5%. If that happened, and the REIT did not have a plan to increase the distribution to an acceptable level, the REIT would become unattractive to me, and I would sell out.

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