COVID-19 Measures To Impact SREITs

COVID-19 Measures To Impact SREITs

The stock market is irrational. With “Circuit Breaker” being announced on Friday, I was expecting the stock market to be in a sea of red however it was the reverse. The stock market went up today. Do not be too happy yet as a new Bill that was passed in Parliament today will most likely have a significant impact on S-REITs.

A new Bill for COVID-19 (Temporary Measures) was passed in Parliament today. Under the new bill, landlords will not be able to terminate the lease of tenants or claim back the rented premises if the tenant is unable to pay the rent during the relief period of 6 months. Under the new bill, the landlord is also not able to take legal action.

As part of the COVID-19 measures, landlord must pass the property tax rebates to the tenants. Those landlords that failed to do so will be guilty of the offence and can be fine up to S$5,000.

These measures will definitely add financial pressure to Retails REITs such as CapitaMall, Mapletree Commercial Trust and SPH REIT as the held back of rental payments by tenants will affect the landlord’s operating cash flow. If you didn’t know, S-REITs have to pay out 90% of their annual distributable income in order to qualify for tax exemption. With such added pressure, I believe the S-REITs managers will retain cash for operational purposes and further slash the already miserable dividend payout to investors.

There are certainly pro and cons to the new measures being introduced. If I am a tenant or shop owner, I will definitely benefit from the new measure as reduced shopper traffic and “Circuit Breaker” will impact my business. The new measure relieves the financial burden.

As a dividend investor, I will frown over the new measure as this means higher possibility REIT managers further cutting dividends to sustain their operating cash flow. As land lords are unable to reclaim back the premises should tenants are unable to pay rent, the land lords will not be able to seek new tenants as well, impacting the rental reversion.

Last, we all know REITs derive their revenue from rents. I am not ruling out the possibility of REITs taking up more loans which can further drive up their gearing ratio (cap at 45%).

Investment Lessons Learnt From This COVID-19 Crisis

Investment Lessons Learnt From This COVID-19 Crisis

As the COVID-19 outbreak gets more serious, this had caused a significant impact to the worldwide economy. Last week, we just saw the stock prices of REITs falling as much as 50 to 60 percent. My stock portfolio was not spared either. I have sold off The Hour Glass and Kingsmen Creatives earlier this month. I have bought Singtel and OCBC Bank at prices that I deemed attractive. The stock price of Singtel and OCBC Bank continue to fall and I believe no one knows how far the knife will drop.

Below are the lessons that I have learnt from this COVID-19 crisis.

  1. Have a war chest ready for such crisis.
  2. Deploy your cash in Tranches instead of throwing all your monies into the stock market all at once when the stock market crashes. Pace your purchases as well over a few weeks. We have seen the Straits Times Index crash multiple times within 2 weeks. It is very hard to predict or catch the bottom.
  3. Allocate your cash into a few stocks instead of a single stock. Certain companies recover faster than others. By allocating your cash into multiple stocks, this spreads out the risk should 1 out of the stocks you chosen fails to recover from the impact of such crisis. Example, if I have 10K, I will buy into 2 stocks, 5K each.
  4. Train your mind psychologically to follow your investment plan. Most of the time when market is good, we keep buying. When market crashes, we stopped investing out of fear. I believe that a good company will recover faster than the rest when the current crisis is over.
  5. Lastly, do not invest everything. Allocate cash for daily living in case the crisis turns out to be longer than expected.

5 years ago, I read this book titled “The Warren Buffett Stock Portfolio“. There is this quote inside the book that was from the letter that Berkshire Hathaway send to shareholders in 1990 which I felt is meaningful during this crisis.

Even though we had bought some shares at the prices prevailing before the fall, we welcomed the decline because it allowed us to pick up many more shares at the new panic prices.

Berkshire Hathaway shareholder letters, 1990

Keep calm and continue investing!