When Should You Sell Your REIT - Recognizing Warning Signs

Updated: 14 minutes ago

Investing in Real Estate Investment Trusts (REITs) can provide steady income and long-term capital preservation that is vital for your retirement in Singapore. However, knowing when to sell is just as important as knowing when to buy.

Contrary to popular belief, holding onto a REIT indefinitely can be a mistake, especially if certain warning signs emerge that signal a downturn or risk.

Here are three key indicators that might suggest it’s time to sell a REIT:

1: When the REIT Becomes Overvalued

No matter how strong a REIT's fundamentals are, it’s important to recognise when its share price has been driven to overvalued levels. Overvaluation happens when the market pushes a REIT’s price above its intrinsic value, often due to investor hype or temporary market conditions.

When this happens, the REIT’s dividend yield becomes unattractive, and the market has a tendency to revert back to the long-term average levels (a.k.a Reversion To Mean). As such, a correction is likely to occur, pulling the share price back down to more realistic valuations.

At this point, it may make sense for investors to lock in their profits rather than holding onto the REIT and being affected by the inevitable pullback. The objective is to maximize returns and reinvest in opportunities that offer better value.

An example of this is Parkway Life REIT, a REIT with near-perfect fundamentals but was overvalued back in 2021 when the share prices jumped from $3.32 to $5.13 at the back of the COVID-19 hype over healthcare-related stocks.

Due to the substantial rise in share prices, Parkway Life's dividend yield has seen a notable decrease from its usual 4.32% to 2.74%. This has led to a significant correction expected in the coming years as the dividend yield returns to its long-term average.

Key Takeaway:

Selling when a REIT is overvalued allows you to take profits and reinvest in opportunities with higher potential returns, rather than holding on to a low-yielding REIT and taking on the risk of a price correction.

2: When the Fundamentals Deteriorate

A key sign that it might be time to exit a REIT is when its fundamental performance starts to deteriorate consistently with low to no hopes of recovery. This could mean a persistent declining occupancy rates, falling rental income, or growing operating costs.

When the underlying properties are performing poorly, the REIT’s cash flow - and therefore its ability to pay consistent dividends - becomes at risk of suffering from a persistent decline. When the distribution per unit declines, the REIT’s valuation will follow suit, increasing the likelihood of capital loss as the market attempts to retain the prevailing dividend yield.

A possible example of this is AIMS APAC REIT, where their distributable income per share has been on a steady decline since 2014 which resulted in a steady decline in share prices so as to maintain the levels of dividend yield that the market demands.

Another red flag is when the REIT’s management deviates from its core strategy.

For instance, if a REIT that specializes in office properties suddenly starts acquiring a different type of assets that it has no experience managing, this could introduce new risks to investors.

A shift in strategy can expose the REIT to unfamiliar markets, potentially compromising its ability to maintain stable returns. Investors should closely monitor management decisions and determine if the REIT aligns with their risk tolerance and investment goals.

An example of this is Elite UK REIT, which announced that they are expanding their investment strategy, enabling the manager to explore other properties. At the time of the announcement in April 2024, the management had disclosed their interest in hospitality properties.

Despite specialising in office properties and announcing their interest in hospitality properties, in October 2024 the management announced their application to develop a data centre – which is yet a separate type of property.

Key Takeaway:

Investors should consider selling off their REIT when its performance weakens or when management strays from its core competencies, as these changes can increase risk and diminish returns.

3: When There is a Better Alternative

The opportunity cost of holding onto a relatively underperforming or overvalued REIT is significant, especially when there are better alternatives available.

If you identify a REIT with similar property exposure and risk levels but offering a higher operating yield or better long-term prospects, it may be time to make a switch.

For instance, if you hold a retail REIT that has appreciated significantly and is now overvalued, but you find another retail REIT that offers the same type of property exposure at a lower valuation and higher yield, selling your current REIT and reinvesting in the better opportunity could enhance your portfolio’s returns.

By making a calculated move to invest in a REIT with a lower price-to-earnings ratio or higher dividend yield, you position yourself for better income and potential capital appreciation.

Key Takeaway: Always be on the lookout for better opportunities, and be prepared to sell when you find REITs that offer higher yields or more attractive valuations.

Conclusion

Knowing when to sell a REIT is just as critical as knowing when to buy.

Selling at the right time—whether due to overvaluation, deteriorating fundamentals, or better alternatives—helps protect your capital and ensures your portfolio remains aligned with your financial goals.

Investors who actively monitor these warning signs will be better positioned to make timely decisions, avoid losses, and optimize their returns in the long run.

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