This could really doom REITs

This could turn the REIT structure into a liability and doom it for the next 3 years. Be afraid. Be very afraid. REITs’ worst nightmare: Fed hiking cycle. The world of low interest rate is over. The REIT vehicle is a liability, not an asset.

Danger lurks in REITS

  • REITs are tax-efficient vehicles that use lots of debt to squeeze out dividends.
  • They have 1.5x more debt than the average STI company. Debt to total assets = 35% (STI average is 14%).
  • When interest rate is low, REITs are great investments.
  • When interest rate goes up, REITs are poor investments. They pay higher interest for loans, resulting in lower dividends to investors.
  • As bond proxies, REITs fall out of favour quickly. When bond yields rise, REITs underperform. The reverse is true.
  • No respite for 3 years. Fed is turning hawkish and expects 3 hikes yearly till 2019.

How to invest?

  • Be very selective and nimble on REITs. Vivatrust looks decent.
  • But other REITs look risky. When in doubt, just avoid. The odds are not in your favour.