A year of rising cost and fundraising activities

Unless you are a DINK or a working single who is likely to enjoy a pay adjustment to help cover the cost of inflation, you should by now feel the effects of inflation in several aspects of our daily lives. Whether we are going for groceries in supermarkets or cooked food in food centres, we can’t miss the feeling that the general price level has gone up. Indeed it is. The government has put the core inflation to be about 1.6% for November 2021. While, the projected core inflation is expected to be at about 0.9% for the whole year, the highest since January 2019, and that the headline inflation to be at a nominal percentage of about 2.3%, we find that many everyday items have actually gone up by as much as 10%-20%.

Then there is the property sector. To the delight of property agencies and property owners, properties have been transacting at new record prices. For the month of November alone, 29 HDB flats had transacted at prices more than $1 million compare to only 20 in the month of October 2021. Throughout the year, it is not difficult to receive information on properties breaking new highs in transaction prices. While a small portion of this increase could be work-flow disruptions that caused property prices to rise, the main driver is the huge liquidity sloshing in the system. The recently-announced property curbs have helped to taper off the demand but the phenomenal increase in the transaction price that had already taken place in the past few months has already taken a toll new property owners and renters alike.

Then there is electricity, gas and water bills. Tariff rates have hit record high. So, far the increase is about 30%. The trend is likely to continue into next year. In fact, the writing is already on the wall. In today’s BT, it was announced that the tariff under the SP group will move by $0.0133 per kilowatt hour, from 24.11 cents per kWh to 25.44 cents per kWh, not including the GST.  Separately, the City gas also revised its tariff by $0.017, from $0.1904 kWh to $0.2162 kWh after factoring the 7% GST. Furthermore the hike in GST from 7% to 9% is also on the card, and can be activated anytime soon. So, bit by bit, these bills are starting to hurt our pockets.

Source: BT, 31 Dec 2021

Stocks, in particular, the REITs have seen several fund-raising exercises too, whether they are private placement, preferential offering, or selling perpetual bonds. REITs with strong brand-names like Ascendas and the members in the Mapletree group were quite aggressive in their fund raising exercises, raising between a few hundred millions and more than $1 billion. In the situation of low interest rate but pending expected rate hikes in the near future, the next best thing to do is to raise funds as a last ditch effort to access cheaper funds before they start to become more costly. In fact, one should be mentally prepared that fund raising is an extremely commonplace when we want to invest in reits. The worst situation is when the fundraising activities come altogether almost the same time as all the reits are exposed to the same interest rate environment. Thus, retail investors have to be mindful that fundraising is not only common, they can happen almost all the same time, especially for those reits under the same class, such as industrial, logistic and office reits etc. This could sap away our liquidity, make us allocate funds into stocks that we do not intended to invest further and causing our portfolio to be skewed.

In end 2020, Ascendas Reits raised about $1.2 billion planned for office and DC acquisition. When the acquisition was completed around April 2021, came the Mapletree Industrial Trust (MIT)’s $300m perpetual securities in May 2021. Recently, Mapletree Logistics (MLT) proposed to raise about $692.8 million. (In fact, at the point of writing the blog, Mapletree Commercial Trust Management announced the proposed merger between Mapletree Commercial Trust (MCT) and  Mapletree North Asia Commercial Trust (MNACT). However, it is not expected to have any immediate financial impact on the existing shareholders as yet.)   

Apart from the fundraising by several reits, there are also other non-reits rights issue as well. The  most recent was Stamford Land, whose business interest is in high-end hotels and property development in Australia.  The proposal was to issue 9 rights shares for every 10 shares owned. The new share quantity is 703,735,900, and costing $0.34 per rights share. The total amount to be raised is $239.3 million. It is an extremely deep discount for shareholders as the quantity of new shares is 90% of the current shares issued. This issue is likely to hurt shareholders’ pocket deeply. There could be several more, all to take advantage of the low interest rate before it starts to perk up by early 2022.

Now the question is will these fundraising activities translate to higher fixed income going into the future? Not necessary. Despite a bigger portfolio, the income may not have caught up with the bigger share base, thus pressing down the distribution per unit (DPU). In fact, it is also possible that the share price dips going into the future as interest rates perk up. Share prices of reits bears, to a great extent, the chracteristics of bonds, and they are very sensitive to interest rate movements.   

Invest with care! Happy New Year!

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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