Sunday 10 May 2015

Can You Count on REITs for Retirement?

When the CPF Advisory Panel announced recommended changes to the CPF system early this year, there were some suggestions on the ground that retirees withdraw the amount above the Basic Retirement Sum of $80,500 at age 55 and invest into REITs. This way, they could start receiving income from 55 years old onwards instead of having to wait till 65 years old to start receiving income from the CPF Life scheme. I am not sure if this is a good idea.

As a retiree, you would hope to receive stable or increasing passive income from your investments. How would the distributions from REITs appear to a retiree? The figures below show the annual distributions from REITs listed on Singapore Exchange that have a history of at least 8 years. Note that the distributions are unadjusted for any corporate actions such as rights issue. This is because, to a retiree, he might not be able to fork out money to participate in any rights issues. The distributions shown below are thus for one unit of REIT held from IPO till now.

Annual Distribution from REITs (IPO Before 2006)

Annual Distribution from REITs (IPO in 2006)

As shown in the figures above, the distributions are vulnerable to large rights issues such as those that occurred during the Global Financial Crisis (GFC) in 2008/09. Many REITs had to issue large rights issues during that period to re-finance the debts on their balance sheets. Some of these rights issues were almost 1-for-1 rights issues at near 40% discount to the prevailing market prices (which had already fallen off steeply)!

To a retiree who could not afford to fork out money to participate in the rights issues, he would have seen his distributions from REITs falling by as much as 40% for some REITs. The distributions from some REITs have not recovered to their pre-GFC peak even today.

Post-GFC and post-rights issue, the distributions from REITs have generally increased. However, there are also signs that the distributions have tapered for some REITs. The reasons for the distributions tapering off are due to firstly, the pace of acquisitions of new properties and/or Asset Enhancement Initiatives reducing in recent years. This is the same reason as discussed in REITs Are Not Forever Attractive. Secondly, there is regular dilution due to new units being issued to pay for the REIT management fees and Distribution Reinvestment Plans. If the increase in rental income is unable to outpace the increase in no. of units, the per-unit distribution will taper off or decrease. If the above trends continue, unitholders are likely to receive lower distributions from the REITs going forward.

Thus, are REITs a good retirement asset for retirees, especially those who do not have other sources of income? Nevertheless, I have to acknowledge that for retirees who need to sell down their assets to fund their retirement, there is still a role to play for REITs. See The Great Retirement Challenge for more info.

Lastly, for those who have sufficient passive income and are thinking of a "travel-around-the-world" type of early retirement (as opposed to a "keep-yourself-busy" type in which you might still have some active income), the above figures show that perhaps the most appropriate time to think about early retirement is at the depth of an economic recession. That would be the time when dividends/ distributions from stocks and REITs are reduced, interest rates on bank savings are cut, currencies are devalued, massive rights issues are being held and you know of someone close to you who is retrenched. If your passive income is still sufficient to handle your expenses after all these, then you are truly well on your way to an early retirement!

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  1. chin wai my thoughts is that rights issue you can still sell the rights, however you might have to sell at a discount.

    as for reit for early retirement, i think it is possible due to the relatively passive nature, but its not a buy at any price sort of investment. it is still some form of active management.

    if you have read some of my posts on xirr in the past, they do ok, its just that some ipo prices are quite high.

    1. I guess it depends on the prevailing market conditions. During normal times, there shouldn't be any loss from selling the rights. But during GFC, rights issues weren't fun. The moment the company announced a rights issue, the shares would drop significantly, so those rights were sold cheaply.

      Yes, I agree that REITs still have a role to play in retirement portfolios, and like you said, it isn't a one-way decision.

    2. i thinkits a sentiments thing, and sometimes its also abit of luck. some stocks just so happen to not have to refinance so much during that period!