Metrics in evaluating a REIT

Since the first listing of REITs on SGX in 2002, this asset class has grown to be one of the most popular investment vehicles in Singapore. There are various merits to include REITs in your portfolio – exposure to real estate at an affordable rate, steady dividends, lower volatility than stocks and backing of value by inflation-resistant tangible assets. With a wide selection of REITs, Trusts and REIT ETFs listed on Singapore Exchange, how can we identify which REITs to be included and what are the evaluation metrics?

With a wide selection of REITs, Trusts and REIT ETFs listed on Singapore Exchange, how should we identify – which REITs should we include in our portfolio and what are the evaluation metrics?

REITs are different from stocks as they are required to pay out 90% of their income as dividends. Therefore, traditional accounting method will not be effective in evaluating them as it will not accurately reflect its income and actual value of the real estate.

Instead, with the help of ShareInvestor WebPro, below are some metrics that can assist you in discovering gems within the REIT sector.

1. Stable and growing Distribution per Unit (DPU)

Instead of searching for high distribution yield alone, investors should also look out for REITs with constant growth in their DPU. An increasing DPU is a good sign that indicates this REIT’s assets are stable and able to attract tenants.

One such example is CapitaLand Mall Trust (C38U) which has a positive period to period growth for the past 5 years, apart from 2016.

Similarly, Mapletree Commercial Trust (N2IU) reflects positive DPU across the past 4 years, which the highest growth of +6.03% in 2017.

2. Price to NAV

Price/NAV (which is also known as book value) measures the market valuation of the company’s share price relative to its book values.

Typically, any value under 1.0 is considered a good value, indicating a potentially undervalued stock.

Below are some undervalued REITs based on this ratio:

Data extracted as of 22 April 2019

3. Gearing Ratio

Gearing ratio is the total borrowings (both long and short term) divided by their total assets and a ratio of less than 50% represents a low proportion of debt to equity. This ratio is a highly watched figure for REITs investors as most REITs roll on their debt. Due to the unique landscape of Singapore REITs, they are limited to a maximum gearing ratio of 45%.

In general, we are still seeing a healthy landscape in the Singapore REIT sector as over 80% of the REITs have a gearing ratio of less than 40%.

4. Distribution Yield

Distribution yield is the measure of the income that you receive, relative to the size of your investment. REITs generally offer distribution yield that is higher than the stock market average.

For the past few years, Singapore REITs have an average yield ranging from 6% - 8% and this is probably one of the main reasons that investors adore this asset class.

Below are some of the highest yielding Singapore REITs:

Data extracted as of 22 April 2019

Other than the four metrics shared, tenant mix, occupancy rate and lease expiry profile are also some of the main evaluation criteria for REITs.

2H2019 remains positive for the Singapore REITs sector with analysts calling for positive outlook as rate hike fears subside. With the data available on ShareInvestor WebPro, we hope to empower you in your search for the best performing Singapore REITs.

For more information on the features and data available on ShareInvestor’s investment tool, please visit www.shareinvestor.com/webpro

 

Educator Index

Archive

2019
June
May
April
March
February
January
2018
December
September
October
November
October
November
October
September
August
July
June
May
April
March
February
January
2017
October
September
August
July
June
May
April
March
February
January