Question: I have a question with regard to the risk factors with investing in A-REITS. I have holdings in several small REITS paying 7-8% returns. Their occupancy looks fine as do their lease and loan expiry profiles. Their debt levels are low.
So these factors appear OK. Recently there has been talk about A-REITS being “bond proxies” with values hit by rising bond yields. Are REITS that trade around NTA subject to this risk or is it only the REITS that have been trading at a premium to their NTA? There is also the prospect of increasing finance costs as interest rates start to lift. I believe the impact s on performance will be slow to appear, but could the market move more quickly than actual finance costs.
I see these issues as particularly relevant as small A-REITS have very low turnover and exiting them may be more difficult than exiting a large A-REIT.
Answer: Thanks for the excellent question.
I think that if:
- occupancy rate is good;
- strong WALE;
- close to NTA; and
- low debt, with interest rates fixed
then you should be broadly ok, but if the whole REITs market continues to comes under pressure, your REITs won’t be able to stand in the way.
You are right about REITs, particularly smaller REITs. In 2008-2010, no one wanted to know REITs and they were the worst performing sector on the ASX. In 2014 to 2016, they have (until recently) been one of the best performers. It is almost like there is no half -way position.
My view is that interest rates are going higher, so I am not investing in REITs and staying underweight. Would I use this recent recovery as a chance to get out of my less liquid holdings/ most marginal exposures? Probably yes.
Question: How will franking credits be affected by the company tax changes advocated by the Prime Minister?
Answer: Let’s answer this through an example. Assume that a company makes a profit of $100.
If the company tax rate reduces, franking credits will also reduce. Currently, for every $30 of tax paid, a company is able to pay a franked dividend of $70 (dividend $70, franking credit $30). If the tax rate is lowered to 29%, then for every $29 of tax, a company can pay a franked dividend of $71 (dividend $71, franking credit $29).
However, although franking credits will reduce, the dividend in cash should increase because the company has less tax to pay. The Company still makes the same $100, it just pays less tax – and has fewer franking credits to pass back to you.
Bottom line – it should have absolutely no impact on you as a shareholder – your net after tax position shouldn’t be impacted.
Question: Would you be able to revisit and give an opinion on fixed income ETFs on the ASX?
I wrote an article on this back in October (see here [1]).
I haven’t changed my views since then.
To recap:
- I am still a little bearish on bonds (that is, yields going higher) – so I would stay with funds with a short duration;
- On the basis of the research, the case for active bond managers is not strong. Hence, I prefer ETFs over active bond funds; and
- Unless you are very bullish about interest rates and need really long duration, recommend that you look at a blended fixed interest fund that has corporate bonds and semi-government/supranational rather than pure government bonds. Retail investors don’t need to pay the liquidity and credit premiums for government treasury bonds.
IAF or VAF.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.