REITs as Substitute to Fixed Income Investments? Think Again…

Singapore REITs have fallen more than 10% from their recent peaks in the last 2 weeks!

FTSE Straits Times RE Invest Trust Index (Source: Bloomberg)


What happened? Should you be concerned if you are heavily invested in REITs? If you are a long-term investor with holding power and no pressing liquidity needs in the foreseeable future, then such price swings and paper loss should not bother you too much.

But if you had invested in REITs as a substitute to fixed income instruments, with the intention of getting back your original capital plus interests to pay for your property down payment one year from now, for example, then you may lose some sleep over such market volatility.

Here are some key differences / comments between fixed income (bonds, loans) and equity (REITs, stocks) investments:

Fixed Income (bonds & loans) Equity (reits & common shares)
Dividends / Coupons Coupon payments from fixed income instruments are clearly stated at the onset and have to be paid at regular intervals. Dividends from equities and REITs are not fixed in amounts and/or frequency of distribution.
Principal Repayment Fixed income investors will be repaid their principal upon maturity. Equity has no fixed maturity and there is no certainty on the future stock price.
There is a chance for the equity price to be below the entry level at the time of liquidation. If liquidity is needed for a planned expenditure, you may not be in a position to take any shortfall risk.
Claims Fixed Income investors have priority claims during liquidation and are repaid first before shareholders. Shareholders are the last to be repaid from any recoveries.
Risk-Reward Fixed income investments are usually capped by the coupon/interest paid. Equity investments offer unlimited upside potential.
Returns potential should be considered alongside the risks investors are asked to bear and be adjusted accordingly to individual needs and preferences.

So if I desire a fixed return over a fixed period and do not want to fully undertake shortfall risks on my principal due to price volatility, where should I put my money now?

Not bond funds.

Not bonds: long-dated bonds have too much sensitivity to interest rate in the current low yield environment while short-dated bonds are simply too expensive.

How about a basket of P2P loans? Stay tuned for more…