Category: Your Money

Indian REITs – Why You Should Care

The SEBI and the RBI are almost done with finalizing the regulation around REITs. Here’s a quick primer of what’s in store.

What are REITs?

REIT stands for Real Estate Investment Trusts. It is a company that mainly owns, and in most cases, operates income-producing real estate such as apartments, shopping centers, offices, hotels and warehouses. The shares of REITs can be listed on a stock exchange and can be traded just like any other stock or ETF.

How are REITs structured in India

Size

The size of the assets under the REIT shall not be less than Rs. 1000 crore which is expected to ensure that initially only large assets and established players enter the market.

Public participation

Minimum IPO size should be Rs. 250 crore and minimum public float should be 25%. Initially, till the market develops, the units of the REITs may be offered only to HNIs/institutions and therefore, the minimum subscription size shall be Rs. 2 lakhs and the unit size shall be Rs. 1 lakh.

Regulatory requirements

The REIT can only invest in assets based in India.

The manager needs to have at least 5 years of related experience coupled with other requirements such as minimum networth, manpower with sufficient relevant experience, etc.

The sponsor of the REIT will have to maintain a certain percentage holding in the REIT to ensure a “skin-in-the-game” at all times.

90% of the value of the REIT assets shall be in completed revenue generating properties.

90% of the net distributable income after tax of the REIT should be distributed to the investors.

The REIT cannot invest in vacant land or agricultural land or mortgages. But can hold mortgage backed securities.

The aggregate consolidated borrowings and deferred payments of the REIT have been capped at 50% of the value of the REIT assets.

The NAV should be declared at least twice a year.

You can read the full set of regulations on the SEBI website (pdf).

Who is likely to benefit?

Real estate developers might see a benefit in terms of reduced funding costs in the short-term. Mall-operators might choose to offload some of their properties into the new structure.

There might be a brief period of disruption as pricing information becomes public and developers lose their ability to exploit information asymmetry. The rent-vs-own argument gets new data points as well.

For the long-term, this gives investors the ability to gain liquid exposure to an otherwise illiquid asset class. Instead of trying to develop a multi-tenant apartment block yourself, you can just go buy a REIT for a lot less headache.

Watch for companies like Brigade and DLF to move their serviced apartments and malls into the new structure. And maybe push some unsold inventory as well. [stockquote]DLF[/stockquote] [stockquote]BRIGADE[/stockquote]

Global Finance Facts That Were Unspeakable Just 5 Years Ago

Gillian Tett has a brilliant article on FT about the “sacred cows” of finance that have been sent out to pasture over the last 5 years and the new line of thinking that has evolved:

  1. Bigger is no longer better
  2. Finance is no longer viewed as self-stabilizing
  3. We now know that taxpayers are on the hook when finance goes wrong
  4. Leverage matters
  5. Liquidity matters
  6. Bubbles form
  7. Structural solutions are not taboo
  8. Shadow banking should not remain in the shadows

 

To this, I will add:

  1. Policies always have unforeseen side-effects
  2. Regulatory arbitrage happens faster than regulation

Source: Ideas adjust to new ‘facts’ of finance

Where do returns come from?

Philosophical Economics has a gem of a piece out on what influences total return.

Total returns on holding equity securities come from:

  1. the change in price from purchase to sale, and
  2. the dividends paid in the interim

i.e. Total Return = Price Return + Dividend Return
 

Price Return =

Price Return from P/E Multiple Change
+ Price Return from Earnings Growth (Realized if P/E Multiple Were to Stay Constant)

 

Stock prices don’t change because market participants choose to assign stocks different P/E multiples. Rather, they change because the eagerness of the aggregate investment community to allocate wealth into stocks rises or falls. More investors try to “put money to work” than try to “take money off the table”, and vice-versa. In the presence of the imbalance, the price has no choice but to change.

 

So, Price Return =

Price Return from Change in Aggregate Investor Allocation to Stocks
+ Price Return from Increase in Cash-Bond Supply (Realized if Aggregate Investor Allocation to Stocks Were to Stay Constant)

 

For a given set of environmental contingencies–e.g., history, culture, demographics, etc.–the equity allocation preference is mean reverting. It rises in expansionary parts of the cycle, as people become more optimistic about the future and more eager to maximize what they see as attractive returns, and it falls in contractionary parts of the cycle, as people become less optimistic about the future and more concerned about protecting themselves from losses.

 

This is also backed up by another piece of research that shows that in the long-run, economic growth and stock market returns are negatively, not positively, correlated. Why? Because investors routinely appear to overpay for growth. Besides stock returns is determined by earnings growth per share, not economy-wide corporate earnings growth. The two can vary markedly.

equity returns vs gdp

In other words, investors should invest more in equities when the economy is in the shitter and exit when they hear “India Shining” ads.

 

Source:
The Single Greatest Predictor of Future Stock Market Returns
Rising GDP not always a boon for equities

The Little Book of Behavioral Investing: Process, Process, Process

Paul J Meyer said, “Productivity is never an accident. It is always the result of a commitment to excellence, intelligent planning, and focused effort.” This is a universal truth. Yet we forget it time and again because of a myopic perspective. Investments are inherently going to peak and slump. It’s part of the game. But if we focus on immediate outcomes and change our investment process, we miss out on the gold mine at the end of the longer, more winding road.

Cover of "The Little Book of Behavioral I...

This is James Montier’s point of discourse in the 16th and final chapter of The Little Book of Behavioral Investing: Process, the one thing we can control.

Performance is a dicey thing. For one person, performance could be about winning all the time. For another, it could be losing today but winning tomorrow. When it comes to investing, the second approach can take you far. Focusing on the short-term and expecting to win all the time would not only be unrealistic but also catastrophic to long-term financial goals.

Consider baseball. The performance of teams is not measured on each win or loss. A season with 60% wins is celebrated. In the same vein, Las Vegas casinos are not worried about one-off losses. Their eye is set on average profit, the longer haul. They have the betting process so perfected that they can afford a few losses here and there. The process works! To perfection.

So why should investors or their clients expect wins every time? It’s naive. And unwise. Yet, investment processes are tweaked every day or week for small winnings that’ll keep outcome obsessed clients’ happy. It can be a gamble investors make to stick with their jobs. Or it can just be a lack of vision.

Nothing can escape the truth of Russo and Schoemaker’s simple matrix on outcomes and process:

Good outcome Bad outcome
Good process Deserved success Bad break
Bad process Dumb luck Poetic justice

 

Does a good process always work? No. A good process can lead to good and bad outcomes. That’s because outcomes are affected by luck and circumstances, things we can’t control. But if the process is sound, it will work in the long-term, overriding short-term misses.

Does a bad process always fail? No. And that’s worse than a good process falling short. When a bad process returns a good outcome, all people see is the outcome. Not many analyse the win or honestly admit that it had nothing to do with their skills or intellect. Or worse, the win may not be analysed at all. Investment strategy could be altered on the basis of the onetime fluke, for catastrophic results.

Following an outcome-based strategy is fatal to investors. Outcomes are too unstable. For example, it is possible to be right over a five year window but wrong in a six month view. Price volatility could change outcomes completely.

Outcomes lead to another problem – skewed judgement in hindsight or outcome bias. People will judge the soundness of past decisions on the basis of outcomes. If a strategy fails (and even the best can, for unpredicted reasons), it is condemned along with the decision maker. If the strategy proves successful, there’s a war over who deserves credit. You see this happening in parliament all the time.

The outcome bias is why people are afraid of taking decisions that don’t return immediate results. Ruling political parties exhibit this behaviour quite often. Rather than taking the best approach to solve problems, they select the shorter route to please people; even when they know that the long-term repercussions will be disastrous. Price controls are a perfect example of such flawed strategy.

The same outcome bias applies to investors. The apprehension of being held accountable for outcomes leads to substandard choices that guarantee certainty, compromises on product quality, wasted time, and risk and loss aversion. If we remove outcome accountability and replace it with process accountability, the decisions of investors become far more astute.

The right approach therefore is to focus on process rather than outcome. A process that focusses on long-term goals could fail in the short-term but that’s alright. The time to tweak investment methods is when you are most successful, not when you see under-performance. This is John Templeton’s advice to investors.

So next time things look bleak, don’t start doubting your investment decision. If your focus was long-term, have the patience and grit to stick to your guns.

 

Monica Samuel is doing a chapter-wise review of the book: The Little Book of Behavioral Investing: How not to be your worst enemy by James Montier. You can follow the series by following this tag: tlbbinvesting or by subscribing to this rss feed: tlbbifeed

 

Weekly Recap: Everything Has A Price

nifty weekly performance heatmap

The Nifty ended the week +1.72% (+1.53% in USD terms). It was week with a lot of surprises. The market expected the RBI to raise rates but it held steady. The consensus was that the US Fed would hold off tapering but it announced a $10B taper. Three months ago, stock markets around the world fell on taper fears, but rallied when the taper was finally announced.

Index Performance

IT stocks rallied on improving US and Eurozone fundamentals. Glaxo’s buyback offer pushed MNC & Pharma indices.

index weekly performance

Top Winners and Losers

SRTRANSFIN +10.53%
CUMMINSIND +11.18%
GLAXO +19.13%
UBL -4.21%
HDFCBANK -3.67%
JINDALSTEL -3.60%
Cummins can finally be moved to “value in motion” from “value in waiting.”

ETFs

JUNIORBEES +4.08%
INFRABEES +2.36%
NIFTYBEES +1.60%
PSUBNKBEES +1.39%
BANKBEES -1.27%
GOLDBEES -2.07%
Gold is turning out to be a rout this year. Looks like the US Fed has engineered a perfect recovery…

Advancers and Decliners

advancers and decliners

Yield Curve

RBI’s decision to hold rates steady lead to a pretty adjustment…

yield curve

Investment Theme Performance

Market elephants had a windfall gain due to Glaxo’s buyback offer. Momentum themes turned in a strong show as well.

*Contributed Themes

Sector Performance

weekly sector performance

Thought for the Weekend

If you thought women disliked randy ads, think again.

When men and women view sex-based ads featuring a cheap watch versus an expensive one, their reactions differ. Men’s reactions don’t vary much, regardless of how much the watch costs. Women, in contrast, strongly dislike the sexual ad when it’s selling a very cheap watch, but they tolerate it when it’s selling a watch that’s expensive.

Source: Women Will Tolerate Sexually Explicit Ads — at the Right Price