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Sunday, April 5, 2020

Why am I not interested in REITs and business trusts?

I don't like to invest in REITs and business trusts because of their business model.

The REITs and business trusts' business model relies heavily on the following:
1. The need to acquire another asset with a higher yield growth.
2. The need to increase existing rental yield by increasing rental incomes from existing tenants.
3. The asset acquisition is restricted by the loan to value (LTV) restriction.

The main disadvantages:
1. Typically, the tenants cannot survive in bad times.  The fixed rental contracts won't impede the retail store closures.
https://www.channelnewsasia.com/news/business/sasa-cosmetics-to-close-all-retail-stores-in-singapore-12146180

https://www.dw.com/en/high-end-stores-in-hong-kong-face-closures-as-mainland-chinese-stay-away/a-51843374

2. Banks may recall the loans because of LTV restrictions due to falling valuations.

I've written something similar about this for the shipping trusts.

http://sg-stock.blogspot.com/2017/03/qualitative-vs-quantitative-analysis.html

Many analysts touted the REITs and business trusts investments because of their stable yields but they disregard the risky business model.  The analysts that touted the shipping trusts in the past had gone into hiding after the collapse and nobody had promoted the shipping trusts again ever since.

2 comments:

Eric Ho said...

https://www.scmp.com/business/companies/article/3081810/clothing-giant-esprit-shut-down-all-56-stores-asia-outside

Don't ever think that a big retailer won't close down!

Eric Ho said...

https://cnalifestyle.channelnewsasia.com/style/zara-owner-inditex-to-close-up-to-1200-stores-worldwide-12822818