Banks vs REITs: Which is a Better Investment Now?

The Singapore Investing Circle has been buzzing with a question: Should we invest in banks or Real Estate Investment Trusts (REITs) given the possibility of rate cuts in the coming months or next year? This debate highlights the classic “OR” mentality – choose banks or choose REITs.

But what if there’s a better way?

Enter the “Genius of AND”. This concept, from Jim Collins’s book “Built to Last,” encourages us to embrace “both” instead of “either.” Can we apply this to our investment strategy with banks and REITs?

Both Banks AND REITs Offer Value

From 2009 to 2021, low interest rates were the norm, making REITs a popular choice for investors. REITs benefitted from the lower borrowing costs, allowing them to distribute a larger portion of their earnings.

However, the recent rise in interest rates has shifted the landscape. Banks are now seeing a boost in their earnings. While historical data suggests periods of low interest rates are the exception, it doesn’t mean we should abandon REITs altogether.

If our goal is consistent passive income, both Singapore banks and well-managed Singapore REITs can be valuable additions to our portfolio.

Resilient Banks

As mentioned previously, banks (DBS, OCBC, UOB) have proven their ability to maintain earnings even during periods of declining interest rates, as long as the drop isn’t drastic. They can grow their loan book and potentially see a rise in non-interest income.

Strong REITs Can Weather the Storm

Over the past few years, well-managed REITs (FCT, MLT, PLife) with robust operations have shown that they were able to withstand challenging economic environments.

These resilient REITs maintained their distributions per unit (DPU) despite facing two challenges: rising financing costs and a strong Singapore dollar impacting foreign currency expenses. However, they were able to mitigate these with staggered debt profile, strong occupancy rates, and positive rental revisions.

Focus on Long-Term Income, Not Short-Term Price Fluctuations

Investing, especially for income, is a long-term strategy.

Short-term fluctuations in share price, which can occur with both banks and REITs, shouldn’t be a primary concern. As long as the underlying businesses continue to generate healthy earnings and declare consistent dividends, the share price is likely to recover eventually.

Remember, investing for income is a marathon, not a sprint. Only invest with money you don’t need for at least the next five years.

Diversify Beyond Banks and REITs

While I value Singapore banks and REITs for their reliable dividends, I prioritise diversification in my portfolio. As some regular readers might remember, I also invest in income-generating stocks like HRnetGroup and Venture Corporation.

To further diversify and pursue capital appreciation, I also allocate a portion to growth stocks. This approach likely explains why the decline in REIT prices over the past two years didn’t cause me too much of a concern.

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