Initially, I wanted to title this post “The Disastrous Singapore REITs Model” but decided otherwise.

So why do I think they are a disaster?

A REIT is an instrument that allows small investors to have indirect access to real estate investment at an affordable cost. Through this investment, you will be entitled to a steady stream of dividends (distributions) from the rental income.

From the developer’s point of view, it offers them a chance to divest of their assets and recycle their capital into new projects.

REITS has been available in other more mature markets prior to the first Singapore REIT listing of CapitaMall Trust (CMT) in 2002. Ascendas-REIT (A-REIT) followed in November 2002 and this was followed by a steady stream of other REITs.

A REIT is intended to be a defensive instrument as it relies on revenues generated from income producing properties held in its portfolio. As rentals are more or less constant, investors are assured of a steady stream of dividends.

A REIT manager earns fees by charging a management fee based on the assets under management (AUM), as well as associated fees for adding/selling properties from its portfolio. The higher the AUM, the more fees he would earn. Needless to say, REIT managers are always on the lookout to grow their portfolio. Which is what many of them did.

It is only possible to justify (to investors) adding more properties to a portfolio if the acquisitions are yield accretive. This means the new properties that is being added to the portfolio must give a higher rental yield than the yield on the REIT itself (at the current stock price).

In 2004 to 2007 when the stock market was booming, many of the REITs were trading at a high valuation and had yields that were quite low. So it was easy for a lot of REITs to go on an acquisition spree using either debt or equity (or a combination of both) to finance their purchases. Some of them used too much debt which resulted in highly geared balance sheets.

As most of the REITs managers were just benchmarking their gearing levels to their peers at that time, everything seemed normal so everyone just concentrated on growing their AUM. Every acquisition was followed by a press release highlighting the good news about how so-and-so REIT has grown and is now bigger. Come reporting time, they could also put a positive spin on the results by reporting higher earnings or distributions (in absolute $ terms) even though there could be just a marginal increase in the distribution per unit (DPU).

Investors are also happy as they were enjoying both their dividends and capital gains from high valuations.

The reality check came in 2008 after Lehman Brothers collapsed. Due to writedowns on the property, many of these REITS discovered that their gearing had become untenable to the banks. It was a very challenging time for them as the debt market was practically frozen up at that time as well.

In the end, most of them with over-geared balance sheets had to raise cash in the form of equity. Raising equity at a time when the share price is low can be very dilutive to shareholders who are not part of the equity raising process.

One example is when you do a share placement to preferred investors.

Another example could be retirees who had invested all their life savings in REITs for the dividend streams and had no more money to take up their Rights issue. Perhaps some of them also didn’t really understand the implications of a Rights issue and didn’t wish to fork out more money to subscribe for their rights.

For those existing investors who could raise the capital to subscribe for their rights, they are returning most (if not all or more) of the dividends they had collected back to the REIT. Don’t let the discounted price fool you as you are essentially paying just to maintain your percentage shareholding in the REIT.

This is the reason is why I deem REITs to be a failure. Touted as a defensive investment with a steady income, it has failed to deliver its promise.

However, not all the REITS are failures as there are some exceptions. There are a few REITs that had kept their gearing relatively low throughout the years and did not have to raise any equity during the crisis. While investors in those REITS might have suffered a paper loss in capital value during the crisis, the prices have largely recovered by now.

Long term investors would have been well rewarded with all the dividends they had collected over the years if they did not panic and sell out at low valuations at the wrong time.

The reason why I’m writing this post now is that recently, some of the REITs have returned to the acquisition path again. As their stock prices have recovered from 2008, they can now make yield accretive acquisitions again.

Will history repeat itself?

As an investor, what I am looking for is not a REIT that keeps on growing its AUM. All I really need is one that can manage its existing assets well and not get into any (financial) trouble.

A very good site to track Singapore REITS is this website – SGX REIT Data. It is updated daily with the latest news and provides a comparison of the different REITS including their gearing, dividend yield, etc.

The db x-trackers DB Commodity Booster Light Energy ETF and the db x-trackers DB Commodity Booster Dow Jones UBS Commodity ETF track indices which apply a rule based strategy called optimum yield (“OY”) when rolling the commodities futures underlying the index.

The OY mechanism seeks to maximise the roll benefits in backwardated markets and minimise losses from rolling in contangoed markets with the objective of outperforming the underlying S&P GSCI Light Energy Benchmark and DJ UBSCI Benchmark respectively.

Contango is a scenario where the price of futures in the forward market is higher than the spot price. A fund that keeps on rolling over commodity contracts into the forward market might severely underperform the actual price movement of the underlying commodity.

You can read this article for a better understanding of the Contango Effect.

The Deutsche Bank Commodity Booster – S&P GSCITM Light Energy Euro Index is intended to reflect the performance of certain commodities. It comprises 24 commodities, representing the five broad commodity sectors, i.e. energy, precious metals, base metals, agriculture and livestock.

The DB Commodity Booster Dow Jones UBS Commodity (DJ-UBSCI) USD Index is intended to reflect the performance of 19 commodities based on the terms of their futures contracts. The Index represents five broad commodity sectors, i.e. energy, precious metals, base metals, agriculture and livestock.

More information on these ETFs can be found on the DB ETF website.

MSCI China
All-in Fee (p.a.): 0.65%
ISN: LU0514695690
SGX Code: LG9
BBG Code: LG9 SP

MSCI India
All-in Fee (p.a.): 0.75%
ISN: LU0514695187
SGX Code: LG8
BBG Code: LG8 SP

MSCI Malaysia
All-in Fee (p.a.): 0.50%
ISN: LU0514694370
SGX Code: LG6
BBG Code: LG6 SP

MSCI Thailand
All-in Fee (p.a.): 0.50%
ISN: LU0514694701
SGX Code: LG7
BBG Code: LG7 SP

With the db x-trackers S&P/ASX 200 ETF (LF1 SP), Deutsche Bank becomes the first ETF provider to list an ETF tracking the Australian stock market in Asia. The db x-trackers MSCI Japan ETF (LF2 SP), which has close to USD 550mn in assets under management, is the first MSCI Japan ETF to be listed in Asia.

db x-trackers ETF on: All-in Fee (p.a.) Listing Currency ISN SGX Code BBG Code

S&P/ASX 200 (Australia)
All-in Fee (p.a.): 0.50%
Listing Currency: USD
ISN: LU0328474803
SGX Code: LF1
BBG Code: LF1 SP

MSCI Japan 0.50%
All-in Fee (p.a.): 0.50%
Listing Currency: USD
ISN: LU0274209740
SGX Code: LF2
BBG Code: LF2 SP

The ETF (K6Y SP), which is tradable in AUD, tracks the Australia SSA Bonds Total Return Index which reflects a portfolio of AUD-denominated bonds. The index has a yield of 5.21% and a duration of 4.18.

The Index aims to be representative of the domestic Australian bond market and intends to reflect, via a rules-based methodology, the economic performance over time of a notional dynamic portfolio of AUD-denominated bonds issued by Australian Sovereigns, foreign sovereigns, supranational organizations, sovereign agencies or local government authorities meeting the relevant eligibility criteria.

Underlying bonds must meet certain eligibility criteria including but not limited to having a notional amount outstanding of at least AUD 100,000,000 and a time remaining to maturity of one calendar year at the monthly re-balancing date. The Index is published in AUD by Deutsche Bank AG, acting through its London Branch and has a base date of 31 December 2003.

All-in Fee (p.a.) : 0.25%
SGX Code : K6Y
ISN : LU0494592974
BBG Code : K6Y SP

This ETF tracks the DBLCI-OY Balanced USD Index (FX Hedged Deutsche Bank Liquid Commodity Index™ – Optimum Yield Balanced) and is intended to reflect the performance of 14 commodities: WTI Crude Oil, Brent Crude Oil, Heating Oil, RBOB Gasoline, Natural Gas, Aluminium, Copper, Zinc, Gold, Silver, Wheat, Corn, Soybean and Sugar.

All-in Fee (p.a.) : 0.55%
SGX Code : J0S
ISN : LU0455008614
BBG Code : J0S SP

Looks like the restructuring is not going to happen. This is not surprising if you read the “ Cash and Special audits” announcement released about a week ago. Some examples:

• As a result of the resignations of a substantial number of staff in the China subsidiaries of the Company (“the China subsidiaries”), the process of locating outstanding information and documents was considerably impeded.
• The Manager had difficulties confirming the signatories for the Group’s other bank accounts as there was lack of information due to the resignations of the former staff of the China subsidiaries who were privy to such information. Those former staff and possible bank signatories could not be located by the Manager. The Manager could not get any of the remaining employees of the China subsidiaries to assist in locating those former staff.
• The Company’s CEO subsequently spoke to Sino-Environment’s former Executive Chairman and CEO, Mr Sun Jiangrong to request for his assistance in identifying and locating the bank signatories of the China subsidiaries’ other bank accounts in China. He did not provide any assistance.
• The Board decided to appoint Beijing-based law firm, Tian Yuan Law Firm (“TYLF”) to commence procedures to secure the rights of the Board to appoint new bank signatories for the relevant bank accounts, legal representatives and directors for all the Group’s China subsidiaries. TYLF also verbally informed the Company that the work is expected to take between one to two years to complete.

In view of such circumstances, what can anyone possibly do? You can’t even access your own bank accounts! And everyone has gone missing. Investors in Sino-Environment have surely been taken for a long ride.

Another reason for me not to touch S-Chips – ever. It is just too difficult to do the necessary due diligence on these companies.

The Markit iBoxx ABF Korea Government Index that is being tracked consists mainly of Korea government bonds.

ISIN: LU0480088441

The yield of the underlying index is currently around 4.5% with a duration of 3.87

While the ETF is listed in USD, the underlying assets are in Korean Won so investors’ currency risk is actually to the Korean currency.

The Index reflects the daily rolled deposit earning the Interbank Overnight Cash Rate (“IOCR”), which is the short-term money market reference rate for transactions denominated in AUD in Australia published daily by the Reserve Bank of Australia (the “RBA”). The IOCR is the interbank overnight weighted average rate at which trades are arranged between market participants and reflects the actual AUD overnight funding rates transacted by market participants.

The money market rate published by the Reserve Bank of Australia (RBA) is currently at 4.25%.

The performance of the ETF, based on the historical return of the index minus fees, would have ranked in the top 10% of Australian cash funds in the last 5 years (source: Morningstar)

The Australia Money Market ETF can be traded in AUD, SGD, or USD and has an annual all in fee of just 0.20%.

Note that whichever currency ETF you buy, you will still maintain an exposure to the Australian dollar as that is the currency of the underlying asset. Of course, if your funding source is in SGD, buying the SGD version would make sense as it will reduce your currency conversion cost (assuming you trade often).

The Dow Jones STOXX® Global 1800 Index provides a broad representation of the world’s most developed markets with a fixed number of 1800 components and contains 600 European, 600 American and 600 Asia/Pacific region stocks represented by the Dow Jones STOXX® 600 Index, the Dow Jones STOXX® Americas 600 Index and the Dow Jones STOXX® Asia/Pacific 600 Index respectively.

The Index components are selected on a regional basis:

Americas, Europe and Asia/Pacific, with 40, 30 and 30 components allocated to each region, respectively. The Index has a base value of 100 as of 31 December 1998, and was introduced in February 2007.

Deutsche Bank db x-trackers has listed the DJ STOXX Global Select Dividend 100 ETF (US$) on the Singapore stock exchange (SGX) last month.

This ETF tracks an Index which measures the performance of the 100 stocks that pay the highest dividends in Europe, the Americas, and Asia/Pacific. The dividend yield is currently about 3.9%.

For Asian investors, the ETF highlights the “tax friendly” nature of ETFs domiciled in Europe as they are not subject to a US withholding tax on dividends of up to 30% (for ETFs domiciled in US).

Exchange Name : DBXT DJSTGLDv 10 US$
ISIN : LU0292096186
Bloomberg Ticker : XGSD SP
SGX Code : KT3
Total expense ratio : 0.5%