by: Tam Ging Wien
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Due to the popularity of our previous two post relating to our series on Yield Spreads on REITs, we decided to publish a yield spread chart on another popular REIT this week - Ascendas REIT.
If you have not had a chance to catch our previous 2 articles, do catch them at our links below:
A Real Estate Investment Trust or REITs for short are a type of professionally managed collective investment scheme with its primary business being the acquiring, owning and financing of income generating real estate. REITs have the benefit of providing investors with a regular income stream and prospects of long term capital appreciation.
For more information on how to analyse and invest in REITs, make sure you check out our related articles on REITs here:
Due to is steady stream of income derived from rentals of its underlying real estate assets, REITs are frequently viewed from a yield perspective.
If you would like to learn how to invest in REITs, be sure to also check-out our upcoming seminar entitled REITS to RICHES: Everything You Need to Know About Investing Profitably in REITs and register using the promo-code "SPECIAL50" to get $50-off (or 12.5%-off) the ticket price immediately.
To know if a particular REIT is trading at a price that is returning a good yield, investors may compare the REIT's DPU Yield against known risk-free rates to calculate the REIT's yield spread.
The risk-free rate is the annual interest an investor would earn if investing in an asset that is considered absolutely risk-free. Typically, the risk-free rate would be the bond yields of a highly rated bond from a sovereign nation. In the case of Singapore, the 10-Year Singapore Government Securities (SGS) can be used as the reference risk-free rate.
At the time of writing, the 10-year SGS is currently trading at a yield of about 2.25% to 2.75%.
A yield spread is the difference between yields of the REIT under analysis against the risk-free rate. The yield spread will provide a measured gauge of the risk premium when investing in the REIT.
The chart above is the historical Yield Spread (%) chart for Ascendas REIT against the 10-Year Singapore Government Securities (10-year SGS).
Since Jun-2010, the average trailing yield for Ascendas REIT is 6.31% while the average yield spread is approximately 4.19%.
At the moment, the yield spread for Ascendas REIT is approximated to be 3.32% which is between the 1-StdDev and 2-StdDev line indicating that its currently trading at a fairly high price.
Ascendas REIT closed last week at $2.71 (13-Jul-2018).
For Ascendas REIT to currently provide the historical average yield spread of 4.19%, it would need to trade at approximately $2.355. That is a 13.1% potential price correction in order for it to revert to its 8-year mean yield spread. This would entail a trailing yield of 6.64%.
For Ascendas REIT to reach a good buy opportunity in our view would be for it to trade at at least 1+StdDev above the mean yield spread. At this rate, it would need to trade at a price of $2.168. That is a 20.0% potential price correction. This would entail a trailing yield of 7.21%.
The last time that Ascendas REIT traded as such a high yields in Dec-2016 and Jan-2017 when it was trading at a range of between $2.25 to $2.35. However during this same period, the yield spreads where close to 5.00%.
We think that this is very unlikely to fall into the $2.168 to $2.355 range in the near future as Ascendas REIT rarely trades as such high yield spreads unless there is an unforeseen blackswan event that occurs.
Nevertheless, we will still like to see a price correction below $2.50 to $2.355 before deciding to take a potential stake in Ascendas REIT. This gives us some level of margin of safety.
If you are planning your entries for REITs, make sure you enter at a level that gives you a high margin safety. Using the yield spread is one method to estimate an entry price with a comfortable margin of safety.
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Price at $488, this is by far the most comprehensive REITs workshop available in Singapore. We focus on REITs can deliver both capital appreciation and sustainable dividends. During the workshop, we focus our learning with practical examples of real world REITs case studies both local and overseas. This is to ensure that attendees can immediately apply what they learn.
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If you would like to learn more about REITs, make sure you check out our most popular post related to REITs and Business Trusts. We hope that you will gain much insight from our coverage of this sector:
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