Liquidity in REITs: How Easily Can You Exit Your Investment?

Daniel Lee

5 hours ago3 min read

One common misconception among beginner investors is the belief that they can always buy and sell their investments at the market prices displayed on their trading screens.

While this may hold for highly liquid assets, real estate investment trusts (REITs) can present a different picture, particularly in markets like Singapore.

Understanding liquidity is crucial for any investor looking to navigate the REIT landscape effectively.

What Is Liquidity & Why It Matters

Liquidity refers to the ease with which an asset can be bought or sold without significantly affecting its price.

High liquidity means there is a large volume of buyers and sellers, allowing transactions to occur smoothly.

Low liquidity, on the other hand, indicates fewer overall participants in the market or significantly fewer participants on either side of the trade (i.e. Sellers > Buyers), making it harder to execute trades at the desired price.

During times of market stress or panic, liquidity can dry up quickly, causing drastic fluctuations in share prices. This phenomenon can be particularly pronounced in smaller markets or niche investments such as REITs.

When liquidity is low, attempting to sell a significant position can lead to a notable price decline, eroding the value of the investment.

The Liquidity Situation of S-REITs

Despite being the 4th largest REIT market in the world, housing REITs with over 10 billion in market capitalization value, the average liquidity for REITs in Singapore is disproportionately low as compared to the market capitalization of the listed REITs.

With liquidity being so low and often dominated by institutional players, it often results in high volatility during periods of uncertainty or stress which we’ve seen over and over again as institutional players attempt to liquidate their position in a market that cannot fully absorb their supply.

As retail investors, when it comes to portfolio construction, investors should always assess the liquidity of a REIT before committing to a large position. If the REIT in interest is worth committing to a large position, investors should have a clear exit implementation strategy in mind to avoid moving the market when existing.

The saving grace for us as retail investors is the agility that we have over institutional players.

If you notice that the fundamentals or valuations of a REIT have changed for the worse or better, you should exit or enter the market as soon as possible before the institutional players move (from experience there is usually a 1–3-day delay).

On the flip side, given the difference in investment mandate and horizon, the liquidity situation and high price volatility also present retail investors taking advantage of sharp price movements to pick up some shares at a discount during periods of uncertainty and liquidating the shares when the market is euphoric.

Conclusion

Liquidity plays a pivotal role in REIT investing, especially within the context of the Singapore market.

Investors should be proactive in assessing the liquidity of any REIT before taking a significant position. This assessment helps mitigate risks related to sudden price drops and ensures smoother exit strategies when needed.

Ultimately, understanding and factoring in liquidity is essential for effective REIT portfolio management and achieving long-term investment success.

If you would like to read my analyst report on Singapore Listed REITs, you can find them on my telegram channel:

*Join the channel → click on the channel name → under files → download the report you want!

If you would like to learn about REIT investing, you can find my entire methodology in my eBook: Retire With REITs here:

If you are looking for personalized financial advice, I offer a 1-to-1, fee-only consultation where you will receive personalized strategies to design, implement and manage a profitable REIT portfolio. You can find out more about it here: