It’s always nice to have friends around and to talk your heart out. When one of them turns out to be an expert in REITs – the hottest investment option in the Singapore area – a one-on-one can make for both a fun and insightful conversation.
On this occasion, our Chief Investment Officer, and overall nice guy, Arun Pai, asked his close friend and REITs guru – Pratyush Rastogi (GenR Capital), to shine light on the real estate sector in Singapore as part of our ‘Kristal Conversations‘ video series. Pratyush has a decade of experience in the investment field, with expertise in building businesses in finance, healthcare, and transport sectors. He was instrumental in helping one of Singapore’s biggest corporate transport companies – Grab for Work – reach the heights it currently enjoys.
Recently, Pratyush started out on his own with his Family Office – GenR Capital, where he helps investors ‘compound wealth’; with REITs being one of the primary sectors that his firm handles. On the sidelines of Arun’s conversation, we couldn’t resist asking Pratyush several other questions about real estate, his investing mantras, and fintech. Read on!
Tell us a bit about your investment background and experience.
I’ve had a bit of an eclectic background – from the trading floor to startups own family office. This has also spanned globally – I started my career in Barclays Hong Kong, worked in PE in India, built startups in the US, and now find myself back in Singapore where I am building my family office. My specific investment experience has been in fixed income and equity.
I started my career, around the same time as you, right about the time Lehman collapsed and working through 2008/2009 really helped shape my investing ethos. How important it was not to get carried away in euphoria, to take advantage of corrections in the market rather than panicking, and mostly that it’s imperative to think for yourself.
Money management is tricky. What draws you to it?
It’s an amazing job – you’re essentially paid to read, think, and learn all day long. It’s intellectually fascinating and it requires discipline and extreme patience. It’s a job you can do for decades, and you get better and better every day. Most of the best investors you can mention are 60+!
Your biggest financial lesson so far.
For me, I don’t think there has been a better financial lesson than the GFC that I was fortunate/unfortunate (depends how you look at it) to work through. It taught me how destructive exuberance, excess leverage, derivatives, and obsession over growth can be. It also taught me how short a memory the market has. I started my career on the credit structuring desk, mostly trying to restructure credit assets, like synthetic CDOs for clients who were taking large write-downs. In 2008 I thought to myself, there is no way these products will ever come back, clients who owned them got hurt so badly – but low and behold just two years later, as interest rates were at their lowest, clients started asking for the same products just for 1-2% pick up in yield! People don’t learn!
How would you define your investing/wealth management style?
In the traditional sense its very value oriented – influenced heavily by the teachings of Ben Graham, Warren Buffet/Charlie Munger, John Bogle, and Howard Marks.
On equity its very straightforward: Buy a limited number of companies where you understand the business, like the management, and can buy with a margin of safety.
On REITs: I like REITs with stable assets and a focus on DPU growth.
On Bonds: Predominantly investment grade with strong cashflows or strong sovereign support.
You are now building a Family Office. Any tips of the trade you can share with us?
Negotiate very hard with your bank to ensure you’re getting the best funding terms, commissions, and service. Unfortunately due to regulations you will very rarely find 1 bank that will suit all your needs so you need to shop around. I’m constantly amazed at how much family offices are paying for basic things like equity execution that any online broker will do very cheaply nowadays.
As an expert in the Singapore market, can you explain to our investors what REITs are and why they make for such good investment options?
A REIT is a company/structure that holds real estate assets which produce rental income. Typically REITs due to tax laws have to pay out at least 90% of their taxable income each year to unit holders. They make good investment options for a couple reasons (and I’ll predominantly talk about Singapore based REITs).
- They are easy to understand: In Singapore most of the office buildings and malls you go to are owned by REITs. So for one it’s easy to understand the asset. You can just walk around the mall on a weekend and observe if people are shopping there or just hanging around. Or you can go to an office building during peak hours (morning/evening/lunch) and see how busy its or look at the guide to see if the building has marquee tenants.
- They provide good yields: SGD denominated assets are not very high-yielding. But with REITS you can easily find yields of 5-6%, which for investors is reliable cashflow.
- They are mortgage and downpayment-free: It allows investors to access the Real Estate market without the huge down payment or massive mortgage! For just a few dollars you can own a part of the Singapore skyline! And best part is you can sell it at anytime.
In terms of fixed income or equity, I prefer looking at REITs as a more fixed income type investment. I typically think investors should invest for the cashflows rather than the capital appreciation. I often describe investing in REITs for capital appreciation like going to a restaurant to spot a celebrity. Its cool if it happens (and it does happen!) but it’s not the reason you should go. Inherently as profits are paid out and not re-invested you don’t get that compounding effect you would in a traditional company. So capital appreciation happens as asset prices rise, but investing for that reasons requires you to time the real estate cycle which is tough to do .
REITs typically have high gearing ratios, making them more susceptible to rate changes. How do you think this domain will fare if the Feds decide to change rates?
Yes this is true, and you have seen interest rates lead to changes in prices quite recently. In mid-2018 as interest rates were rising, you saw a sharp correction in REITs, and in Q1 2019 when interest rates stabilised you saw a sharp rally. That said there are a few things that mitigate this:
1) MAS caps Leverage at 45% of Asset value (60% in some cases, but you rarely see it that high), and
2) the fact that REITs have ensured 70-80% of their debt is in fixed rates.
Amazon effect on retail vs REITs — your thoughts please?
Of course online sales will have and are having an impact on tenant sales. But if you look at the largest retail REIT in Singapore , CapitaLand Mall Trust, nearly 50% of its rental income comes from F&B outlets, supermarkets, services, and leisure and entertainment. So in that sense they are somewhat protected as people will still want to go to restaurants, to the movies, and to the gym. Further in Singapore URA controls how many malls can be created, so that artificial supply constraint does help support rentals.
For someone new to investing in REITS, what would be your five-pointer checklist before they begin investing?
There’s no written-in-stone rulebook, but in general one should:
1. Be prepared to do the work. Go visit the locations, read annual/quarterly reports, ask questions at the AGMs. If you’re not willing to do it – just buy an ETF which tracks the index.
2. There are a couple good books worth reading – like “Building Wealth through REITs” by Bobby Jayaraman is a good one.
3. Focus on asset quality and cash-flow consistency rather than yield. Higher yield does not equate to better REITs!
4. Track NPI growth and DPU growth overtime – good REITs focus on this rather than constant dilution for acquisition.
5. Watch the leverage and interest cover.
Any specific names you are interested in currently ? Regions/ industries?
As mentioned I like REITs which have strong assets and stable cashflows. For example let’s take for example some of the hospital REITS. Parkway to take an example, owns the best hospital assets in Singapore, it has a built in rental increase in its contracts with its renter (who is also its owner), and they have kept their outstanding units very stable since IPO. So those are some of the characteristics I would look for.
Retail investors have a massive attraction to Singapore REITs – but do they understand the share dilution that takes place and hence lower ownership % thinking about it as a business?
Good point – and if you ever go to any of the AGMs hosted by the REITS you’ll see many of the unit-holders are retirees who may/may not understand the complexity of dilution. But that’s why its important you look for REITs that focus on DPU growth rather than just asset growth. There are also some REITS where managers are compensated based on DPU rather than NPI so that’s a step in the right direction.
Due to legal aspect of paying out over 90% of earnings, compounding can’t take place – thoughts in regards with how do you value a business then?
So there are many qualitative ways you can value a REIT’s p/b comparisons to averages, or discounted cash flows from operations. but one of the nice things about REITS is you can qualitatively value them. If you find a REIT that is at full occupancy and at the higher end of the rental cycle – and can’t expand without dilution then that’s a signal that it might be fully valued. If the opposite is true then there is quite a bit of growth ahead of it and is likely undervalued – remember its better to be roughly right then exactly wrong .
Now, the last question – you have been in the business a long time, on both sides of the table (both as an investor and as a wealth manager). They say there is a “fintech revolution” coming? What do you think?
It’s a natural evolution of what happened in 2008. We were staring into the abyss. Long standing financial institutions and companies were collapsing, credit froze, and financial markets were falling 50-60%. So the regulators did the only things they could, cut interest rates, print money, and increase regulation. Unfortunately now, some of that regulation has gone overboard – banks are forced to hold too much capital and have to be very careful who they lend to. So unless regulators relax a bit, you’re going to see startups fill in the gaps in areas where banks cannot or do not want to enter.
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