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Reits May Kill You In A Economic Downcycle

Mar 24, 2008
Reits make up a significant part of the Singapore stock market, so i will just put it in the simplest way i can. If you are holding on to any highly leveraged reits at the start of a new recession cycle, it could prove fatal to your investment portfolio, forget about that juicy dividend they have been giving in the PAST.

A Reit, is usually laden with debt to pay for its pricey assets purchased during the economic expansion that we have enjoyed for the past few years. Any net income it gets from this pricey properties are mostly drained away to give their shareholders dividends

The danger is obvious, there are many Reits that have sprouted up and aggressively expanded during the recent economic boom and like fair weather flowers that die in a storm, how will this highly leveraged Reits react if the value of their properties and their monthly income gets hit by a prolonged economic downturn, something which the world could be facing today.

1) High debt equals to 1a)High interest payments, 1b)Debt accumulated by buying optimistically priced assets during a economic boom and 1c)Value of assets prone to write downs during a downturn.

2) Asset value shrinks equals to 2a)Value of assets...falls -> company worth less -> share price falls in adjustment, 2b)Value of asset falls, stipulated 'Debt : Asset ratio' becomes unbalanced, might trigger force selling of assets to stay listed and 2c)Value of asset falls, may have to issue new shares and dilute the shareholdings of already suffering shareholders. or in the event of a sale, company is very likely to be selling off assets at a loss.

3) Income shrinks equals to 3a)Dividends falls -> Yield falls -> Share price falls in adjustment, 3b)Might have difficulty meeting interest payments while maintaining a good dividend and 3c)Difficulty in rising new capital may pose problems to this capital intensive companies.

This debt-laden, cash-drained entities will have to deal with falling income, falling asset values, steady or increasing interest rates and keeping within stipulated agreements. of course, this is assuming that we will experience a worsening in the current economic situation.

There is hope in the sense that Merger & Acquisition activities may provide life to the Reit market but before anyone goes looking for reits trading below their net asset value, please bear in mind that their current estimated net asset value is a poor reflection of the future asset value in a prolonged economic downturn.

In Singapore, many Reits have been popping out over the past 2 years. They are mainly in the prime retail, prime commercial, prime hospitality, industrial and healthcare sectors. So far we have only 1 reit that focuses on suburban retail properties, none that focuses on the non-prime commercial sector and none that focuses on the mid-range to budget hospitality sector.

Listed on the Singapore stock exchange, are several Reits that invest around Asia, such as India, Indonesia, Hong Kong, Malaysia, China and Japan.

There are strict regulations in place to safeguard investors interest, we have the privilege of being a investor friendly hub, from which retail investors may safely invest in other countries.

This article has been compressed to comply with the article distribution service it is using, for the original article with proper spacings, please visit my blog below.
About the Author
Kendrick runs a site that combines the best of Singapore bloggers in the financial field. His site is filled with informative, well written posts by Singaporeans who are passionate about blogging, to the point where they have been blogging (for free) for years Visit Singapore Investments to know more about the exciting and safe opportunities that Singapore can offer to you
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