Let's do a quick recap. Instead Bay we have combed through thousands of listed reads and formed a potential list of them. In this section, we will focus on step B, which consists of two sub steps Step one, and step two. In step one, we will gain insights into the business models of the five types of popular reads on the markets. Going through this step will empower you to have a better understanding of the different types of reads, what their individual quirks are, and how they derive their income. Once that is done, we will move on to step B two, which is to cherry pick the best reads under each type by using the A lm framework.
I will explain more on this framework later. Let's begin with step B one. First up, we have retail reads. They are reads that only lease and develop regional shopping centers, strip malls and single tenant and retail properties. This type of reap derives income by leasing shopping spaces to retail businesses like Costco and McDonald's. They are the easiest to research as you can simply visit the malls and observe how well the businesses are doing.
They're just like the video on the left. For this reason, I would encourage any new read investor to start off by looking at this type of reads first, since they are rather intuitive, other than being intuitive retail rates in general are known to be resilient to economic downturns. their earnings are less volatile than those of other retail like hospitality and commercial reads. This is hugely due to the stickiness of their tenants. Unlike other real tenants who can just snap their fingers and move to another area for the sake of cheaper rent. Retail tenants are more wedded to the locations because of their regular customer base.
Think about it. If you have a stall that has been selling your own brand of shoes, would you pack up and go just because the rent fees have increased, very unlikely, as you have to consider the loss of customers and the damage to your brand image that comes with moving about too often. Before I move on to the next reads, I would like to clarify the difference between earnings volatility and unit price volatility. See, when I mentioned that retail rates, earnings are less volatile. What I meant to say here is that the income that the retail Reed receives from his tenants is more predictable and stable than some of the other reads. But retail reads much like the rest of the other reads are still considered volatile investments as their unit prices are subjected to the temperament of the stock market participants.
In other words, your read can change Can you to enjoy good business prospects and even distribute higher yields, but its unit price can still drop due to uncertainties in the stock market. Just want to clarify right. Next insights into hospitality rates. These rates are commonly known as hotel rates. Hospitality reads conquer the investment world by owning and renting places of a combination and rest. hotels and resorts are under their jurisdiction.
Hospitality reads derive their income by leasing out to operators such as Westin, Mandarin Oriental and Marriott. In turn, these hotel operators manage the hotel and rent the rooms to guests. Hotel reads usually sign a long term lease with their operators. This lease is known as the master lease agreements, and under this Agreement, the hotel rate will collect rent fees from these operators in two proportions, the regular fixed portion and the variable portion that varies with the financial performance of the hotel. On to the next point, reads often announce asset enhancement initiatives, which simply means the renovation of one or more of their properties. Usually when investors hear such news, they tend to get excited at the expectation of newer properties will garner higher rents which leads to higher yields for them.
But do take note that for hotel reads, in particular, any asset enhancement announcements are for the sake of up keeping the standard of the hotels, not so much for the sake of higher rents. So as a hospitality investor, do not expect higher yields, just because your hotel room announces a revamp of one or two of the hotels Another point worth highlighting is that hospitality reads are the riskiest amongst the five reads. What I mean by riskiest is that the earnings are easily affected by a myriad of reasons, from being susceptible to economic downturns to being ravaged by unpredictable factors such as earthquakes, outbreak of diseases, and so forth. The implication here is that you have to take into account all these additional risks before buying into any hotel route. Excellent. The next type of reads we're going to talk about are industrial rates.
The unglamorous feats I usually call them, but do not underestimate their yields. Though their buildings may look unglamorous, the amount of dividends they can bring to you are fabulous. Industrial reads own properties such as distribution center flooded factories, light industrial buildings and warehouses. All these buildings are leased out to small medium enterprises, also known in short as SMEs or multinational corporations in short, MCs or a mixture of both just to meet their backroom logistic needs. The use of industrial space can be categorized into core industrial and ancillary activities. Now, these two terms may seem rather vague to you, so I'm going to explain them further.
Core industrial activities here means on site manufacturing of goods assembly and repair workshops, whereas ancillary activities here means an office space that is used for administrative purposes to support the core industrial activity. Naturally, all these industrial properties are inherently easy to upkeep as such industrial robots Often are able to generate higher yields than the other reads. All right question time. If industrial reads are able to offer higher yields, why do you think investors are not rushing into buy into them? Think about this for a few seconds. Pause the video if you need more time to think.
Alright, the answer could be due to the following. Number one, industrial assets can be kind of troublesome to conduct due diligence over because they're banned entities are restricted. Thus, it is not easy to get an update of how the business is doing. Number two, the tenants in industrial rates can easily Pack and Go especially if the real rents most of their building spaces out to small businesses or sole proprietors here in life Problem with renting out to low quality tenants, collecting rent or negotiating a deposit from them can be difficult. That is why the application of the weighted average lease to expiry, or In short, the whale ratio is often taken more seriously on industrial rates to assess the likelihood of their properties being vacated. Generally, industrial rates will find it difficult to raise rents because tenants are just spoiled for choice.
Warehouses, storage facilities and flooded factories can easily be erected to meet the demand. Thus, the bargaining power usually lies with the tenants and not the property manager. All these quirks imply that in theory, the unit price of industrial reads cannot rise that much and the high yields are a way of compensating investors for the lack of capital gain in the foreseeable future. The subsequent type of read, we should get familiar with his healthcare reads. hospitals, nursing homes and places of surgery and recovery are the underlying assets of healthcare reads. risk averse investors typically love these types of reads as medical properties are not closely tied to consumer spending, travel or job growth, so their earnings hold up even during the worst of recessions.
Similar to hospitality reads leases of healthcare facilities are also made up of two portions. The first portion is the base rent, which is inherently inflation protected, meaning to say that the rent rate rises along with inflation. And the second portion is the variable rent, which rises and falls according to the performance of hospitals in the Reed's portfolio. But what many investors may not be aware of is that type of issue income that flows into a healthcare read. You see, medical properties in general derive their income from either government subsidized patients or privately paid sources or a combination of both. Because government subsidized patients are subjected to changes in policies and somewhat tied to the economic conditions of a nation or state.
I believe a healthcare read that derives most of its income from private sources is relatively more resilient than it reads with hospitals that are overly dependent on government handouts. So do take note of this inside. Considering that since healthcare reads have so many attractive points, it comes as no surprise that they are inherently expensive. With a remarkable chunk of people getting older in developed countries such as Europe, the US, Japan and Singapore, the demand for quality healthcare remains strong and vibrant in most developed countries, the stock markets seem to have priced that in, or perhaps even more. As such, don't be surprised if you see some healthcare rates, yielding only three to 4% or even 2% a year. Last but not least, the commercial reads, commonly known as office reads, office reads, own lease and manage Titanic like properties such as business centers, huge office hours, and sometimes even universities.
These properties are rented to other companies, ranging from big corporations to small businesses. So it comes as no surprise that the performance of office reads are strongly linked to the economy. When the economy is growing, new companies are started and established ones tend to expand All of which causes office space to be in high demand. But when times get tough, you will see the supply of office spaces has outgrown the demand for it as businesses start to close or downsize their offices. Another point to take note of is that the office reads tenants, although not as fleeting as industrial ones, office tenants are far more flexible than retail tenants. What I mean by flexible is that these tenants can still pack up and leave if rents are raised to quickly.
Think about it. One of the main purposes of a corporation's existence is to make profits for their shareholders moving away to a cheaper location makes perfect sense. Because by doing so they can cut down on costs. So even in a stronger economy, there is an ongoing question as to whether Companies will choose to gravitate towards less prestigious business areas where taxes, operating costs and labor are less expensive, or continue to stay in an expensive business area for the sake of image. With that said, office reads unit prices tend to be more volatile than other types of rates due to these factors. And because of these factors, contrary and investors tend to benefit greatly from investing, and this kind of reads.
Well, that covers the insights into the five popular types of reads that you'll usually see on the market. Just a quick recap, we have finished with step B one and now we will be moving on to Step B to step B two is all about using the hlm framework to pick exceptional reads. Although read may have been able to increase its earnings in the past there is no guarantee that it can continue to do so in the future. Considering new competitors are ever so ready to barge in and steal market share exceptional reads are the ones that keep one step ahead of competition and upcoming threats. Hence, these are the reads you want in your portfolio. So, how do we go about selecting these exceptional reads from the list of potential reads that we created in step eight?
Well, the hlm framework is your answer. The acronym a lm, A stands for assets. The intent here is to focus on the properties themselves, what kind of properties will exceptional retold? What do they look like? And why do tenants continue to stay in those buildings? We will look into all of these L stands for location.
Where do these exceptional rates usually buy or build their properties? What makes a location ideal for them? And M stands for management, how they manage the properties and what other values they add. Essentially, this framework is designed so that you can have a list of criteria that enables you to pick up exceptional reads. So let's try it out on retail reads in the next lecture.