REITS carry a simple contagion risk.
If you borrow money to buy your flat / condo, the bank will expect you to pay down your capital over 25 years.
But for REITS, what happens? If your cashflow payment is structured like a REIT, you do not pay down your capital, but the mortgage gets constantly refinance, rolled forward. So someone keeps paying the interest rate forward and the capital is not paid. If UOB or a retail bank does not allow this when you buy a flat, do you think this kind of debt structuring is right? #foodforthought#REIT#reits Once again, another strange financial product that the powers allowed and get passed on to retailers. The benefit is to the general economy again, banks can leand money, money supply increases, more sophisticated products, more highly paid professionals and asset managers, and increase contagion risk of implosion.
Provided the cash calls are DPU accretive and the new funds increase the NAV of the enterprise I do not see the problem.
It is not obligatory to take up the rights, and although some capital gain will not be achieved as new units are always sold at a discount, as long as ultimately the future DPU is as a minimum stable and hopefully increases after the funds have been deployed, then a unit holder is not disadvantaged by rights issues.
Generally the unit price recovers fairly quickly from the discounted rights issue.
The unit holder is simply left with a smaller piece of a bigger pie.
By increasing the size of the REIT with good management it will often make the cost of borrowing capital cheaper and cause the DPU to be more stable.
Naturally, as in all cases when taking a share in a company, we are reliant on a competent management. And, as always, if we are unhappy with the management's performance, sell the shares.
REITS carry a simple contagion risk.
If you borrow money to buy your flat / condo, the bank will expect you to pay down your capital over 25 years.
But for REITS, what happens? If your cashflow payment is structured like a REIT, you do not pay down your capital, but the mortgage gets constantly refinance, rolled forward. So someone keeps paying the interest rate forward and the capital is not paid. If UOB or a retail bank does not allow this when you buy a flat, do you think this kind of debt structuring is right? #foodforthought #REIT #reits
Once again, another strange financial product that the powers allowed and get passed on to retailers. The benefit is to the general economy again, banks can leand money, money supply increases, more sophisticated products, more highly paid professionals and asset managers, and increase contagion risk of implosion.
Reply to @psychology_of_trading : Lol one look and I don’t trust LOL
Provided the cash calls are DPU accretive and the new funds increase the NAV of the enterprise I do not see the problem.
It is not obligatory to take up the rights, and although some capital gain will not be achieved as new units are always sold at a discount, as long as ultimately the future DPU is as a minimum stable and hopefully increases after the funds have been deployed, then a unit holder is not disadvantaged by rights issues.
Generally the unit price recovers fairly quickly from the discounted rights issue.
The unit holder is simply left with a smaller piece of a bigger pie.
By increasing the size of the REIT with good management it will often make the cost of borrowing capital cheaper and cause the DPU to be more stable.
Naturally, as in all cases when taking a share in a company, we are reliant on a competent management. And, as always, if we are unhappy with the management's performance, sell the shares.
@marubozu
any comments on this article?
Reply to @gingwien : Thanks, your explanation has re-affirm my initial view.