*Official* Shiny Things club - Part 2

[Shiny Things]

Hi Shiny,

I remember you mentioning not being a fan of REITs and REITs ETFs. Is the reason because they have the volatility of stocks but not the long term capital growth? Are REITs not able to grow the way stocks can?

I'm not a fan of real estate as an asset class, and REITs are just a vehicle for investing in real estate. They do solve the problems of illiquidity and high transaction fees, but they don't solve the problems of meh performance.

The fact that we can get different answers over different timeframes about "whether REITs outperform" (USRT, the NAREIT index ETF, has beaten SPY over one year and ten years, but trails dramatically over three years, five years, and since its awkwardly-timed inception in 2007) suggests that it's really not clear-cut whether real estate, or REITs, actually outperform stocks. (Though it is clear that stocks have absolutely thumped residential real estate, which is what the Case-Shiller index measures. Having a lot of your net worth tied up in your house is a pretty bad investment!)

As to the question of whether it deserves a place in your portfolio... I ran the numbers on Portfolio Visualiser (admittedly for the US market), and the difference between a 60-40 stocks-bonds portfolio and a 30-30-40 stocks-REITs-bonds portfolio over the last 25 years (PV only has real estate data back to 1994) was only about 20bps annualised. To be fair, volatility and drawdowns were a shade lower.

I think it's a real stretch to argue that that's worth the extra complexity of explaining to people that they should add a fourth fund to a simple three-fund portfolio; it's certainly not on a par with the gains from adding international stocks.

So... given that real estate in general, and REITs in particular, don't seem to add any value to a portfolio, I guess my position is not so much "real estate is bad" as it is "why bother, especially when you're just starting out?".

 

[pmstudent]

I wouldn't necessarily bank heavily on REIT.com as a reliable source for data.

I've spotted one problem. Conventional total return figures don't include tax effects. That might work if you're talking about a U.S. Individual Retirement Account (IRA) or 401(k), but that's only a subset of investing. REITs tend to distribute more dividends, while stocks tend to retain more earnings and reinvest them in the businesses, generating capital gains. Capital gains are tax deferred, and dividends aren't. And if some of the dividends are non-qualified (yes, probably), that's even worse. (Or if you're a non-U.S. person, particularly a resident of Singapore, this discrepancy isn't at all helpful due to 30% dividend tax withholding. You'd much rather have more capital gains and lesser dividends, because the former is tax free to you.)

There's no hint that the blogger at REIT.com made any tax adjustments. Many fund managers do make those adjustments, and they're quite important in the U.S. context.

For the record, I don't underweight or overweight real estate. I think some is fine, which is exactly what I do, but I don't think it makes sense to go overboard in any single sector or geography.

I am afraid we can't find performance that factoring tax. Point that I am trying to say is there is no evidence to say REIT is not a good asset and can't generate long term return. All data I can find, including Bloomsberg, said otherwise.

I am fully agreed with you, nobody should go all out in REIT, but it forms a component of a diversified asset allocation. Btw, the latest version of "Random Walk Down Wall Street", suggest to put REIT as part of asset allocation, because it is proven to generate good return over the long run. Read it.

 

[limster]

But of course, past performance does not imply future result. However, there is no evidence pointing otherwise.

I've noted this for Singapore REITs as well. I've tried to search for studies that show that REITs underperformed STI but only found one positive study in a businesstimes article which I have previously linked.

if it was so easy to prove REIT underperformance, surely one of our hard working local bloggers would have posted the analysis already? instead what I see are virtually all local bloggers holding REITs. My own experience holding REITs has been very positive, getting a nice capital gain and nice dividends every year!

Those that read Random Walk Down Wall Street will even see Malkiel suggesting you add REITs to your portfolio as well. Note that Nobody is saying that you must go 'all in' and only hold REITs. The question is whether adding a bit with improve portfolio risk-adjusted returns.

Some people form their opinion first and only pay attention and quote data that agrees with their opinions Any data they disagree with, they will claim to be flawed. I'm trying to avoid that by actively seeking out data on REITs to show that they are bad for my investment portfolio, and I'm still looking!

 

[BBCWatcher]

I am afraid we can't find performance that factoring tax.

Some of the fund managers report those figures (net of taxes) for their funds — Vanguard is pretty good about that — but their funds don’t go back to the 1920s. Also, their net of tax calculations assume U.S. personhood (if a U.S. fund), which isn’t quite right for investors in Singapore.

Another odd thing about this is that we should see more real estate tycoons atop the Forbes list of the world’s wealthiest individuals if real estate were the path to riches. But we don’t see that; we see a paucity of real estate tycoons in that list. That particular “sanity check” doesn’t fit a bullish story about real estate.

Point that I am trying to say is there is no evidence to say REIT is not a good asset and can't generate long term return. All data I can find, including Bloomsberg, said otherwise.

No, there’s definitely a lot of data suggesting that stocks handily outperformed residential real estate over the timespan when reliable data exist (from 1928). There’s also decent data in a couple countries (U.S. and Holland, as I recall) that stretches back a couple or a few centuries, and real estate (mostly residential again) was quite underwhelming.

Is the future going to be like the past century, past few centuries, or past X years? And what about commercial and industrial real estate? That’s hard to predict. I’m certainly not going to bet heavily on any single sector, real estate included. Researchers just figured out how to reanimate a 4 hour dead pig’s brain cells (in the news today), which certainly seems a lot more exciting than another shopping mall.

I am fully agreed with you, nobody should go all out in REIT, but it forms a component of a diversified asset allocation.

In Singapore, the Straits Times Index (STI) conveniently includes a heavy dollop of real estate exposure, plus you’ll often have your owner-occupied home. I’d say that’s plenty for something like 99.2% of Singaporean investors. Almost nobody in Singapore seems to be lacking real estate investments. For the other ~0.8% we might quibble, but in that case I’d suggest not doubling or tripling down on Singaporean and regional real estate specifically but rather to pay attention to global real estate, still in a reasonable percentage.

Btw, the latest version of "Random Walk Down Wall Street", suggest to put REIT as part of asset allocation, because it is proven to generate good return over the long run. Read it.

I can’t really argue too much against this proposition since I do have some real estate exposure, but it’s not a huge percentage and shouldn’t be. And you have to translate U.S. context to Singapore context, which is that the STI is a weird index (very real estate heavy already), plus home prices in Singapore are insane — a much bigger fraction of personal wealth here, on average. You might see somebody in the U.S. arguing in favor of allocating, say, 25% of an investment portfolio (total household net worth) to real estate when, in fact, a typical Singaporean could already be at 50% or more. The percentages matter. How many times do we see somebody come here with ~80% of their household net worth already invested in real estate asking whether they should buy a piece of residential property? I roll my eyes at that idea, and I think that’s an entirely reasonable reaction. But it happens over, and over, and over.

Similarly, bond allocation advice has to be translated across the borders, primarily because most Singaporeans have CPF.

 

[pocushocus]

Thanks to everyone who contributed constructively to my query. My takeaway is that REITs is not a bad asset class per se, but investors should consider whether it’s worth complicating a portfolio especially when starting out, and if we do take it on, the proportion that makes sense given that singaporeans generally have already sunk much wealth into their homes.

Appreciate the enlightening discussion!

 

[perrinrahl]

In Singapore, the Straits Times Index (STI) conveniently includes a heavy dollop of real estate exposure, plus you’ll often have your owner-occupied home. I’d say that’s plenty for something like 99.2% of Singaporean investors. Almost nobody in Singapore seems to be lacking real estate investments. For the other ~0.8% we might quibble, but in that case I’d suggest not doubling or tripling down on Singaporean and regional real estate specifically but rather to pay attention to global real estate, still in a reasonable percentage.

BBC, does our home perform identically to an REIT, which includes other types of real estate? How significant is the difference?

 

[pmstudent]

People seem to commingle home/residential as the same category as REIT.
No, it is not, JP Morgan clearly showed them as different asset classes, and their stark difference of performance, home (3.4% annualized return) vs REIT (9.9% annualized return) over the past 20 years. Granted, this is US data.

As for the sanity question you brought up - how many billionaires built their empire with real estate? The answer is 10%, the 3rd largest industry in Forbes list, after Financial and Investment, and Fashion and Retail. Surprisingly, ahead of Technology.

Quoted from :
https://www.forbes.com/sites/omased...worlds-billionaires-got-so-rich/#42ffb7ae124c

 

[bobobob]

People seem to commingle home/residential as the same category as REIT.
No, it is not, JP Morgan clearly showed them as different asset classes, and their stark difference of performance, home (3.4% annualized return) vs REIT (9.9% annualized return) over the past 20 years. Granted, this is US data.

As for the sanity question you brought up - how many billionaires built their empire with real estate? The answer is 10%, the 3rd largest industry in Forbes list, after Financial and Investment, and Fashion and Retail. Surprisingly, ahead of Technology.

Quoted from :
https://www.forbes.com/sites/omased...worlds-billionaires-got-so-rich/#42ffb7ae124c

BBCWatcher says there are few real estate tycoons in the list of world's RICHEST.

Your article is referring to overall number of billionaires. It's a decent point, but does not directly refute his.

 

[pmstudent]

BBCWatcher says there are few real estate tycoons in the list of world's RICHEST.

Your article is referring to overall number of billionaires. It's a decent point, but does not directly refute his.

Richest as in top 10 ? Is top 10 more statistically significant or top 1000 ?

Looking at the top 10, you would have thought that Technology must be the sector that produces most billionaires, but it is actually ranked 5th once you expanded the data population.

 

[BBCWatcher]

BBC, does our home perform identically to an REIT, which includes other types of real estate? How significant is the difference?

Identically, probably not, but highly correlated, yes.

People seem to commingle home/residential as the same category as REIT.

REIT stands for real estate investment trust. The real estate can be practically anything: office space, residential (even student housing), hotels, shopping malls, other retail space, industrial (factories, warehouses) -- you name it. The variety available in Singapore is somewhat limited, but globally at least all of the above are available. "REIT" alone doesn't represent any specific subsection of real estate.

Granted, this is US data.

Indeed, and while the United States is the world's largest national economy it only represents some small percentage of the world's total real estate value.

But there are many property tycoons in Singapore richest list. So Singapore properties more valuable.

Not among the world's wealthiest, though. You have to go way down the Forbes list before you bump into the #1 Singaporean real estate tycoon.

My takeaway is that REITs is not a bad asset class per se, but investors should consider whether it’s worth complicating a portfolio especially when starting out, and if we do take it on, the proportion that makes sense given that singaporeans generally have already sunk much wealth into their homes.

Yes, and there's also the fact the Straits Times Index is quite heavily real estate oriented compared to, say, the U.S. S&P 500 Index. So if you're allocating some share of your savings/investing to a STI fund, you're getting a large dollop of real estate automatically. The STI real estate holdings include commercial, retail, hospitality, and industrial subsectors, and of course your own home is residential. This real estate exposure is concentrated in Singapore and regionally.

 

[pmstudent]

Identically, probably not, but highly correlated, yes.


REIT stands for real estate investment trust. The real estate can be practically anything: office space, residential (even student housing), hotels, shopping malls, other retail space, industrial (factories, warehouses) -- you name it. The variety available in Singapore is somewhat limited, but globally at least all of the above are available. "REIT" alone doesn't represent any specific subsection of real estate.

Not trying to debate further, but I guess most people understand what is REIT (the diversified portfolio of income producing real estates that are professionally managed, leveraged and recycling) and what is home (the one you bought and stay).

Yes, and there's also the fact the Straits Times Index is quite heavily real estate oriented compared to, say, the U.S. S&P 500 Index. So if you're allocating some share of your savings/investing to a STI fund, you're getting a large dollop of real estate automatically. The STI real estate holdings include commercial, retail, hospitality, and industrial subsectors, and of course your own home is residential. This real estate exposure is concentrated in Singapore and regionally.

STI has a total of 3 REITS, Ascendas Real Estate Investment Trust (2.47%), CapitaLand Mall Trust (1.86%) and CapitaLand Commercial Trust (1.56%), total constitutes 5.89%.

There are 4 property developers listed in STI, that constitutes 9.51%. Let's generously assume 1/3 of their balance sheet is holding some REITs, total REITs holding in STI is less than 10%.

If 10% of REIT allocation within STI (which might be only a part of your 3 funds portfolio) is what you intend to position, then you don't need to buy more REITs.

 

[BBCWatcher]

If 10% of REIT allocation within STI (which might be only a part of your 3 funds portfolio) is what you intend to position, then you don't need to buy more REITs.

I'd quibble with the numbers a bit, but guess what the U.S. "pros" typically recommend at least to high and higher wealth investors? A 10% allocation is a common recommendation.

 

[pmstudent]

I'd quibble with the numbers a bit, but guess what the U.S. "pros" typically recommend at least to high and higher wealth investors? A 10% allocation is a common recommendation.

That's a very sensible allocation, to have total of 10% asset allocated to REIT,not need to be more than that.

However, if SREIT is 10% of STI, and STI is only 33% of your AA (the other 2 could be IWDA and MBH), then the REIT allocation is only 3.3% in your total portfolio. IWDA may have only a negligible fraction exposure to REIT.

Compared to the suggested allocation by the "experts", we would have underweighted on REIT as a result.

 

[Fabulous50]

I'm not a fan of real estate as an asset class, and REITs are just a vehicle for investing in real estate. They do solve the problems of illiquidity and high transaction fees, but they don't solve the problems of meh performance.

The fact that we can get different answers over different timeframes about "whether REITs outperform" (USRT, the NAREIT index ETF, has beaten SPY over one year and ten years, but trails dramatically over three years, five years, and since its awkwardly-timed inception in 2007) suggests that it's really not clear-cut whether real estate, or REITs, actually outperform stocks. (Though it is clear that stocks have absolutely thumped residential real estate, which is what the Case-Shiller index measures. Having a lot of your net worth tied up in your house is a pretty bad investment!)

As to the question of whether it deserves a place in your portfolio... I ran the numbers on Portfolio Visualiser (admittedly for the US market), and the difference between a 60-40 stocks-bonds portfolio and a 30-30-40 stocks-REITs-bonds portfolio over the last 25 years (PV only has real estate data back to 1994) was only about 20bps annualised. To be fair, volatility and drawdowns were a shade lower.

I think it's a real stretch to argue that that's worth the extra complexity of explaining to people that they should add a fourth fund to a simple three-fund portfolio; it's certainly not on a par with the gains from adding international stocks.

So... given that real estate in general, and REITs in particular, don't seem to add any value to a portfolio, I guess my position is not so much "real estate is bad" as it is "why bother, especially when you're just starting out?".

I have no trouble visualizing that rental producing assets would tend to correlate with the real economy and with non-REIT stocks in the long run. After all a REIT takes rent on a medium to long term basis, usually from a business. So I'd expect that a REIT is a time averaged version of the costs of a business except when a lot of defaults are happening (but even during GFC, this didn't happen a lot in SG).

As usual, its not just returns we want to worry about but risk. I don't know what time horizon you ran your portfolio visualizer (first time I heard of this) on, but I would be interested to see if the variance differs with the time window (e.g. 5Y, 10Y, 20Y etc). If I were to guess, I might find that the difference in variance between a REIT and a stock portfolio might widen for shorter periods excepting when there is a financial shock (when all correlations tend to 1).

 

[w1rbelw1nd]

I don't understand why we have to get ST to "endorse" your methods. Can always have your own execution and understanding on good investment principle right...

His portfolio allocation is hardly the holy grail, and there is no holy Grail for that matter.

 

[revhappy]

Watching the CEO of Blackstone talking on Bloomberg. It's amazing the amount of money they raise and the returns they generate is double of stocks markets with no losses. They invest in Private equities, Real estate etc. I can't help but relate to the discussion about REITs and Real estate in this thread. It's kind of interesting that real estate is so sophisticated that it is considered as an Alternative Investment providing superior returns which institutional investors prefer and at the same time it is something that laymen individual investors too love.

 

[pmstudent]

Watching the CEO of Blackstone talking on Bloomberg. It's amazing the amount of money they raise and the returns they generate is double of stocks markets with no losses. They invest in Private equities, Real estate etc. I can't help but relate to the discussion about REITs and Real estate in this thread. It's kind of interesting that real estate is so sophisticated that it is considered as an Alternative Investment providing superior returns which institutional investors prefer and at the same time it is something that laymen individual investors too love.

Not surprising actually, Real Estates and REIT have high tax adjusted profit margin, a finding by Aswath Damodaran, a professor of finance at the Stern School of Business at New York University.

Industrial Average profit margin =~10%
Here are the top ten :

1.Tobacco: 37.06%
2.Transportation (Railroads): 36.64%
3.Real Estate (General/Diversified): 31.60%
4.Utility (Water): 27.90%
5.Software (Entertainment): 26.66%
6.Semiconductor: 26.59%
7.R.E.I.T.: 25.11%
8.Information Services: 24.08%
9.Metals & Mining: 22.98%
10.Drugs (Pharmaceutical): 22.78%

Quoted from :
https://www.forbes.com/sites/eriksherman/2019/02/19/the-top-most-profitable-industries-and-their-impact-on-low-income-people/amp/

 

[limster]

I don't understand why we have to get ST to "endorse" your methods. Can always have your own execution and understanding on good investment principle right...

His portfolio allocation is hardly the holy grail, and there is no holy Grail for that matter.

yup we had this discussion before. nothing wrong with a core-satellite portfolio. like I mentioned in a previous post, even the author of Random Walk Down Wall Street had a core-satellite portfolio and stated that the biggest holding in his satellite portfolio was China! Myself, my portfolio has ended up roughly 20% China (capital gains never selling, and still adding!)

I think even Shiny has mentioned that if you want to allocate a small part of your portfolio to punt some stocks or sector, go right ahead, you don't need his permission!

On the other hand some think there is only one right answer... those who want to stray from IWDA and invest in REITs, China, or say they are dividend investors.. better watch out!

https://www.marketwatch.com/story/investing-legend-malkiel-says-you-need-more-exposure-to-china

 

[BBCWatcher]

That's a very sensible allocation, to have total of 10% asset allocated to REIT,not need to be more than that.

However, if SREIT is 10% of STI, and STI is only 33% of your AA (the other 2 could be IWDA and MBH), then the REIT allocation is only 3.3% in your total portfolio. IWDA may have only a negligible fraction exposure to REIT.

Compared to the suggested allocation by the "experts", we would have underweighted on REIT as a result.

Not necessarily.

First of all, the “pros” in that article suggested REIT allocations ranging from 0% to 10.5% of portfolio. The 10% figure is on the high side of that particular consensus.

Second, that’s from a U.S. context. This is Singapore, and the typical proportion of household wealth tied up in owner occupied real estate is higher than it is in the U.S., largely due to the quite high home valuations in Singapore. That difference should be properly taken into account when trying to apply U.S. oriented advice to a local context. Another quirky aspect of Singapore is that there’s effectively forced savings biased toward housing (CPF Ordinary Accounts), and the U.S. doesn’t have anything like that. Also, real estate in Singapore is the most heavily taxed investment area, but that’s less true in the U.S. as Donald Trump could probably tell you. Anyway, there are some cross-border translations that should be applied.

Third, I would probably take issue with the estimate (10% of the STI). The last time I looked at this there were a couple cases where one component of the STI owns a big chunk of another component, and the latter is heavily into real estate. So if you miss those cross-ownership interests, you’re missing some of the real estate exposure. It’s not quite as simple as dividing the constituents into two buckets: real estate, and non-real estate.

To editorialize a bit, I’m hard pressed to imagine how real estate (and associated rents) would/could appreciate much faster for much longer than the general economy. It should track general inflation, at least over the medium to long term. One would think. That’s not true of business endeavors in general, some of which contribute to real economic growth. (Did I mention researchers just figured out how to reanimate a 4 hour dead pig’s brain cells? That’s surely more exciting than another shopping mall. ) If you think there is opportunity for genuine innovation in real estate — something akin to the invention of the skyscraper with automatic elevators, which happened a long time ago — then OK, maybe there’s an outsized opportunity for real estate, of a certain sort anyway, to grow substantially in real terms. While I don’t have any better crystal ball than anyone else, overweighting anything really demands some reasonable hypothesis about the future, and why real estate (or any other sector) will shine more brightly. And I just haven’t come up with a good hypothesis along those lines. Locally you might look at birth rates and immigration, but then you’d probably be bearish on local real estate, right?

 

[pmstudent]

Not necessarily.

First of all, the “pros” in that article suggested REIT allocations ranging from 0% to 10.5% of portfolio. The 10% figure is on the high side of that particular consensus.

Second, that’s from a U.S. context. This is Singapore, and the typical proportion of household wealth tied up in owner occupied real estate is higher than it is in the U.S., largely due to the quite high home valuations in Singapore. That difference should be properly taken into account when trying to apply U.S. oriented advice to a local context. Another quirky aspect of Singapore is that there’s effectively forced savings biased toward housing (CPF Ordinary Accounts), and the U.S. doesn’t have anything like that. Also, real estate in Singapore is the most heavily taxed investment area, but that’s less true in the U.S. as Donald Trump could probably tell you. Anyway, there are some cross-border translations that should be applied.

Third, I would probably take issue with the estimate (10% of the STI). The last time I looked at this there were a couple cases where one component of the STI owns a big chunk of another component, and the latter is heavily into real estate. So if you miss those cross-ownership interests, you’re missing some of the real estate exposure. It’s not quite as simple as dividing the constituents into two buckets: real estate, and non-real estate.

BBC, homeownership in SG is heavily regulated (e.g cooling measures) , and taxed especially second property and above. 80% of population live in HDB, controlled by government. Its not attractive, I agreed.

But I started to doubt your knowledge of SREIT. SREIT is structured as a pass-through vehicle, and have to distribute at least 90% of rental profit. It is tax free at the REIT level, and the DPU (dividend) is also tax fee for investors. Please study it.