Saturday, 26 July 2014

Designing a "caveman portfolio" - Part 2

Land is a limited resource, especially in Singapore. As such, investing into the local real estate sector wouldn't be too wrong (I think). Since my "caveman portfolio" is designed with a long-term perspective, I will add one property related stock into it.

To help myself identify the one stock to be added into this portfolio, the first decision that I would have to make is whether should I invest in a company in the real estate business or should I buy into Real Estate Investment Trusts (REITs). From what I know, companies in the real estate business usually would bid and purchase a piece of land, market the project, build, handover the finished product to the buyer and collect the revenue. On the other hand, REITs acquire properties, rent out and manage the assets, and distribute the rental revenue on a regular basis to shareholders. I personally find it more appealing to invest into REITs as it would provide my portfolio with regular dividends.

There are a wide variety of REITs in the market today -- service apartments, industrial properties, retail space, offices, business parks, hotels, hospitals. As our economy matures and progresses, there would be more and more "tertiary level" businesses (e.g. financial services, innovation etc) which require office-type or related space. As such, I believe the demand for office space will increase over time. (For an individual, small investor, owning a physical office space would be relatively difficult. Hence, the option left for me is to invest into a REIT which owns office properties if I would like to gain access to this kind of properties.)

I'm thinking of Keppel REIT. I like the high quality office properties that they have, and their focus on office space. However, I have some concern about their investments in Australian office buildings and the associated risk of exchange rate fluctuations which may affect the dividend yield. That said, I guess I shouldn't worry too much about this, since the management would over time divest properties which they evaluate and found to have become less attractive.

Shall turn my attention to the healthcare sector for my next post.

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