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.