The conclusion of 2023 mirrors my sentiments and hopes – a robust recovery in the market, a realization that the oversold conditions were a consequence of countering high inflation rather than a market bubble. As the Year-on-Year inflation rate recedes, the persistently elevated living costs and prices of goods and services remain, if not escalate.
The initial emergence of the year witnessed both high inflation and a spike in interest rates. Real Estate Investment Trusts (REITs) that failed to hedge their loans effectively suffered from a sudden increase in interest costs. Those exposed to currency risks were also significantly impacted, experiencing diminished rental income returns from overseas assets due to unfavorable forex rates. This dichotomy becomes evident when comparing strong and weak REITs during challenging times.
This scenario implies that companies may not experience reduced returns per se, but rather encounter higher operating costs. The looming risk is that the economy might face a downturn if the high-interest rate situation persists. Thus, the Federal Reserve's indication of lower rates in 2024 is a welcome move. However, luxury goods are the first to bear the brunt, exemplified by reduced orders for items such as Tesla cars.
Investors in US-centric REITs experienced a substantial decline due to various challenges—from the work-from-home trend to high-interest rates and forex impact. Europeans witnessed a reduced but still significant impact. Elite Comm, on the other hand, showed resilience due to renewed government tenants and robust rental escalation. Nonetheless, it could not evade the downturn in the UK economy affecting property valuations and weakening the pound.
Different REIT assets faced varying situations. United Hampshire, while not as severely affected as US Office REITs, demonstrated that its Retail/Storage assets were more resilient. They still grappled with high-interest rates and forex challenges. The CEO's decisions likely played a crucial role, as a swift rebound in their stock price occurred when the Federal Reserve executed a pivot.
How did the portfolio perform? For the year, the portfolio returned an XIRR of 14.6%, as illustrated in the chart depicting an absolute increase in dollars. XIRR, representing money-weighted compounding returns, was achieved through a 10% cash-out to build up a war chest and investments in Singapore Savings Bonds (SSB) and T-Bills returning an average of 3% to 4%.
The multi-year XIRR, calculated over 5 years, stands at 6.6%. This duration was chosen due to cash injections from increased work income and larger dividend reinvestment. The 10-year period seemed too extended, leading to a considerable delta in portfolio size. The 3-year period, on the other hand, could be easily skewed by a single year's performance. Nevertheless, the purpose is to provide a reference for assessing the compounding 5-year trending view.
Looking ahead to 2024, as mentioned in a previous article, the full impact of the rate hike may not have manifested yet, depending on each REIT's specifics. With increasing optimism but tempered by weaker reports, the market will proceed cautiously. I believe there is merit in being vested in banks to capitalize on hedge strategies while still pursuing income-generating investments.
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Disclaimer: The articles presented in this blog reflect personal opinions and are intended for informational and sharing purposes only. Not responsible of errors. Readers are advised to seek professional guidance when making financial decisions and should take full responsibility for their choices.
