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Wednesday, March 30, 2016

Reits vs Developers Business Model‏

Investing in properties is a favorite pastime for Singaporeans because they have been rewarded well over the years in the past.

People are also attracted to property investing because they are able to leverage on their limited capital to buy something which is tangible and much “easier” to manage than dealing with equities. That is until the cooling measures kick in which hits the property market hard in recent years. 

Since then, investors have preferred to deal with the option of equities in gaining traction to properties through investing in developers or Reits since it is much more affordable for the retail investors. But are investing in Reits and developers the same?




Reits

Reits have been a popular investment vehicle since they were introduced as they have a business model that is relatively straightforward and catches the attention of investors who rely on passive income.

They are a clustered group of properties structured under an investment trust and is open for the retail investor to gain ownership through equities.

When investing in Reits, there are certain important factors which an investors have to think about which I have blogged previously (here). The idea is through the master or individual leases, the company receives rental income which is then distributed out to shareholders in the form of dividends after deducting administrative charges.

If you are someone who like to purchase properties and rent out the premise for rental income, then the business model would appeal to you.


Developers

Developers are a different beast altogether when we compare them to Reits and their business model are run differently.

The goal of a property developer is to source for cheap land, redevelop them into new projects and sell to prospective buyers. Their income tends to be lumpy in nature since property projects may take years to complete and selling them may again take time to happen. Even as the management tries to ladder time the completion of the projects, demand are usually much dependent on the economy and property cycle. 

Developers are not known to be a high dividend payer as they require the cash flow retained to tender or source for the next land bank to replenish their inventory. Take CDL for instance. They are able to pay dividends as high as Reits if they decide to pay out all their earnings but because they have to retain the majority of the earnings, their yield is low.

There are several good thing however about investing in developers. First, they are usually big market cap companies who has the power to tender for projects at cheap financing before redeveloping them and passing the costs to the buyer. Even as demand slows down, most developers are strong enough to hold inventory in their balance sheet and only chose to release or develop them in a rising market. 

Also, many developers are now moving their strategies towards investing in commercial properties to boost their recurring income so that their earnings will not be as lumpy. I think the way they are set up are almost similar to Reits now, with a much greater flexibility to transition in their business model.


Final Thoughts

Both are good investment options depending on what you are looking for in your investment.

With interest rates looming and cooling measures still in place, I think a lot of the negativity has much been priced in. Buying low selling high? Perhaps it's a good time to practice that.


12 comments:

  1. Hi B,

    No hard data, but again I felt the negativity has been priced in low ago for developers. Many developers (mid-tier) are trading at hugh discount to RNAV or NAV 4-5 years ago.

    The one cooling measure with teeth is TSDR while vacancy rate etc all
    Pointed to a down cycle
    Market, "price" hardly fall. I seriously do not think the govt with provide the catalyst of removing ABSD.

    But just my gut feel, I always miss boats and wave them goodbye

    ReplyDelete
    Replies
    1. Hi SI

      My take is also that a lot of the negativity has been priced in so the downside is more limited now than previously. When it recovers, it could be interesting to see how they are going to outperform the others.

      Delete
    2. Ass...saya tidak menyanka kalau saya sudah bisa sesukses ini dan ini semua berkat bantuan MBAH RAWA GUMPALA,saya yang dulunya bukan siapa-siapa bahkan saya juga selalu dihina orang dan alhamdulillah kini sekaran saya sudah punya segalanya,itu semua atas bantuan beliau.Saya sangat berterimakasih banyak kepada MBAH RAWA GUMPALA atas bantuan nomor dan dana ghaibnya,alhamdulillah kini saya sudah bisa membuka usaha kembali yang dulunya pakum karna masalah faktor ekonomi dan kini kami sekeluarga sudah sangat serba berkecukupan dan tidak pernah lagi hutang sana sini,,bagi anda yang punya masalah keuangan jangan sungkan-sungkan untuk menhubungi MBAH RAWA GUMPALA karna insya allah beliau akan membantu semua masalah anda dan baru kali ini juga saya mendaptkan para normal yang sangat hebat dan benar-benar terbukti nyata,ini bukan hanya sekedar cerita tapi inilah kisah nyata yang benar-benar nyata dari saya




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      Ass...saya tidak menyanka kalau saya sudah bisa sesukses ini dan ini semua berkat bantuan MBAH RAWA GUMPALA,saya yang dulunya bukan siapa-siapa bahkan saya juga selalu dihina orang dan alhamdulillah kini sekaran saya sudah punya segalanya,itu semua atas bantuan beliau.Saya sangat berterimakasih banyak kepada MBAH RAWA GUMPALA atas bantuan nomor dan dana ghaibnya,alhamdulillah kini saya sudah bisa membuka usaha kembali yang dulunya pakum karna masalah faktor ekonomi dan kini kami sekeluarga sudah sangat serba berkecukupan dan tidak pernah lagi hutang sana sini,,bagi anda yang punya masalah keuangan jangan sungkan-sungkan untuk menhubungi MBAH RAWA GUMPALA karna insya allah beliau akan membantu semua masalah anda dan baru kali ini juga saya mendaptkan para normal yang sangat hebat dan benar-benar terbukti nyata,ini bukan hanya sekedar cerita tapi inilah kisah nyata yang benar-benar nyata dari saya.

      Delete
  2. Timely post as I was deciding whether to buy FCL or FCOT. I suppose FCL is one of those developers where a lot of their income is recurring.

    ReplyDelete
    Replies
    1. Hi owq

      FCL, FCOT and FCT are all in my vested or watchlist closely as well ;)

      Delete
    2. And agree on the recurring income for FCL, seems like they are able to maintain the dividend just from their recurring income, amazing.

      Delete
  3. Developers and REITS are also tied together.

    Some developers sell the developed properties to their own related REITS.

    Of course, in any commercial transaction, one side gains more than the other. You have to know whether developer gains more or thier REITS gains more.

    Buy the correct shares of the winning side.

    ReplyDelete
    Replies
    1. Hi Relac

      Yeah that's right. A lot of developer has set up their Reits wing so they can continue to recycle capital while maintaining the majority of the shareholdings.

      Delete
  4. i think its good to have........ both? haha..

    i believe most of the local investors already have a fair percentage of REITS in their portfolio, due to obvious reasons.

    as you are aware from my blog posts, i am also watching the ADSD and the QC charges of the developers closely..

    In my opinion, most of the developers have run up quite a fair bit since the year. but there is still legs to run up, there should be a correction in the soon, and I am waiting for a fair entry point to some of them.

    ReplyDelete
    Replies
    1. Hi FC

      Indeed, I have both in my portfolio, Reits for the steady dividends and developer for the growth returns. Their valuation are also pretty compelling in my opinion which I think will outperform in the mid term.

      Delete
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    saya PAK SLEMET posisi sekarang di malaysia
    bekerja sebagai BURU BANGUNAN gaji tidak seberapa
    setiap gajian selalu mengirimkan orang tua
    sebenarnya pengen pulang tapi gak punya uang
    sempat saya putus asah dan secara kebetulan
    saya buka FB ada seseorng berkomentar
    tentang AKI NAWE katanya perna di bantu
    melalui jalan togel saya coba2 menghubungi
    karna di malaysia ada pemasangan
    jadi saya memberanikan diri karna sudah bingun
    saya minta angka sama AKI NAWE
    angka yang di berikan 6D TOTO tembus 100%
    terima kasih banyak AKI
    kemarin saya bingun syukur sekarang sudah senang
    rencana bulan depan mau pulang untuk buka usaha
    bagi penggemar togel ingin merasakan kemenangan
    terutama yang punya masalah hutang lama belum lunas
    jangan putus asah HUBUNGI AKI NAWE 085-218-379-259
    tak ada salahnya anda coba
    karna prediksi AKI tidak perna meleset
    saya jamin AKI NAWE tidak akan mengecewakan

    ReplyDelete

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