by: Tam Ging Wien
All examples and stocks quoted here in this article and on the ProButterfly.com and REITScreener.com site are for learning purposes; it does NOT constitute financial advice or a Buy/Sell recommendation. Contents are reflective of personal views and readers are responsible for their own investments and are advised to perform their own independent due diligence and take into account their own financial situation. If in any doubt about the investment action you should take, you should consult a professional certified financial adviser.
REITs especially the large and mid-caps have been on a roll the whole of 2019. Since 31st December 2018, till now, the market cap for the Singapore REIT market has risen sharply from S$88.9bil to S$118.65bil, rising about 33.5% till date. Over the last one year, the market caps of Singapore REITs have risen approximately 30.0%.
The Hong Kong REIT market has also been rapidly rising, closing about 22.3% over the last 1 year.
Observing the top gains over the last year, we can see that REITs with brand name sponsors such as Mapletree, Keppel, Ascendas and CapitaLand dominate the gains, rising 25% and above on capital appreciation alone. Given that the average yields are close to 5% to 6% just a year ago, these REITs would have easily returned investors anywhere from 30% to 38% gains.
On the volume front, those with the largest volumes are also large cap REITs such as the CapitaLand stable, Ascendas, Mapletree and Suntec. These large caps are simply more liquid and allows institutional investors to snap them up easily.
We also observe that the top losers over the last 1 years could be related to a few reasons:
Based on this simple observation, we could conclude a few key points about investing in REITs:
Using REITScreener.com’s proprietary REIT Index as a guide to the overall market’s P/B Ratio (Price/NAV per Unit), we can see that the overall market is currently trading at about 1.18x book value. This compares to the average of 1.01x.
REITScreener.com’s proprietary REIT Index is a market cap weighted index of all the REITs listed in the same exchange. The 2 green lines below represent the 1 and 2 standard deviations below the average while the 2 red lines above represent the 1 and 2 standard deviations above the average.
In simple terms, these lines tell you that over the last 5-years, the market traded within these bands 68% of the time. At the peak of the market valuation was 1.21x during early-July 2019. The market has certainly taken a breather now.
The last high was in mid-January 2019 where the overall market was trading at 1.12x book value.
In the last 5 years, the S-REIT market has never traded at such a high valuation!
Another metric that we can observe is that the yield spreads of the REITs in Singapore have been compressing. The yield spread is the difference in yield between the overall market REIT yield and the 10-year Singapore government bonds.
Since Feb-2016 as worldwide interest rates began to raise, we can see that the yields slowly declining. Even amidst the current market talk of further fall in interest rates, yields continue to compress to just below 3.00%.
We are also seeing a number of examples of institutional investors letting go of their holdings which indicate to us that the “smart monies” are also taking profits. For example, recently DBS Bank Ltd. has disposed 1.2mil shares in Mapletree Commercial Trust via market transaction netting them about S$2,355,960.00. Prudential plc has also disposed 1.216mil shares in CapitaLand Retail China Trust via market transaction netting them about S$1,836,000.00.
These are only some examples of the many fund flows out of the large cap Singapore REITs. We list some other examples of declared trade via REITScreener.com below:
We have listed down among our favourite Singapore REITs which we have been invested in and following for a number of years. We have also complemented teach REIT review with a corresponding historical P/B Ratio chart along with the Buy (Green) and Sell (Red) ranges.
Many of the REITs have already breached the Sell (Red) ranges which indicates to us that we should not be emotional and take profit. There is a time to buy and there is a time to sell – we thing now its time to consider taking some profits in our best loved Singapore REITs.
We released a special report on Parkway Life REIT (PLife REIT) to our REITScreener subscribers and have since made is public in January 2019 which can be accessed on ProButterfly.com entitled Parkway Life REIT – Investing with A Peace of Mind.
We like PLife REIT for its low interest cost, consistent historical track record of growing DPU and NAV per Unit as well as a clear future earnings visibility. This is because PLife REIT has a long WALE, high occupancy rate, sustainable dividend payout and “up only” rental review.
It started the year at $2.62 and now $3.08 at time of writing giving us a 17.6% gain in capital appreciation excluding dividends. At its 2019 high, it was trading at close to $3.15.
We think there is still upside but would like to be cautious and lock in 50% of the gains.
ProButterfly.com published a 2 part series of Ascendas REIT which can be accessed here:
We like Ascendas for its many build-to-suit assets and high-spec industrial properties with sticky tenants. We also like that management has been actively expanding into the UK and Australia, taking advantage of the low AUD and Pound.
However, we do see that going forward, its DPU growth may not be as exciting in its core Singapore assets.
It started the year at $2.55 and now $3.06 at time of writing giving us a 20.0% gain in capital appreciation excluding dividends. At its 2019 high, it was trading at close to $3.20.
We think from here; upside may be limited and lock in 75% of the gains first and wait for the Q2-2019 results to decide what to do with the remaining holdings.
We like the stability of the Data Centre sector where tenants are usually sticky and do not switch frequently. We also like that they have presence in a sector where cloud computing is experiencing high growth with many tech companies growing their presence worldwide. Its latest results for Q1-2019 rose 6.7% from the same period last year, we think that its DPU still has room for growth.
It started the year at $1.36 and now $1.73 at time of writing giving us a 27.2% gain in capital appreciation excluding dividends.
We think there is still upside and will probably wait to see how it performed in FY2019, however we couldn’t resist the opportunity to lock in 50% of the gains first. We plan to hold the remaining 50% of our positions in Keppel DC REIT for now.
One of the perennial favourites among Singapore investors because the malls are well known and frequently visited. Among the large caps that rallied very early on after the October 2018 markets correction.
It started the year at $2.27 and now $2.68 at time of writing giving us a 18.1% gain in capital appreciation excluding dividends. As we held this REIT for much longer, over the last one year, it has risen from $2.08 to $2.68 clocking in a gain of 28.8%.
We think from here; upside may be limited and are locking in 50% of the gains first and wait and see how the new Funan may contribute the higher upside in this REIT.
Another of the perennial favourites among Singapore investors due to its low debt, consistently rising DPU and NAV per Unit and portfolio of sub-urban malls that are predictable and non-discretionary in nature.
It started the year at $2.17 and now $2.66 at time of writing giving us a 22.6% gain in capital appreciation excluding dividends. We held this REIT for many years and it has returned us a fantastic return.
With its recent proposed acquisition of 18.8% stake in the PGIM Real Estate AsiaRetail Fund Ltd that owns and manages sub-urban malls around Singapore such as Tiong Bahru Plaza, White Sands, Liang Court, Hougang Mall, Century Square and Tampines 1 as well as the newly acquired 33.33% stake in Waterway Point we want to continue to hold our positions and see how well this acquisition contributes to its FY2019 performance. However, the gains we are sitting on was too much to give up, so we decided to take 50% off the table first.
Another of the perennial favourites among Singapore investors due to its low debt, consistently rising DPU and NAV per Unit and portfolio of sub-urban malls that are predictable and non-discretionary in nature. Our frequent visits to Vivocity also shows high volume of shopper traffic. Its AEIs in B1 and also additions of the National Library have certainly kept foot traffic and hence rentals well supported. Furthermore, their AEIs for the new Fairprice would likely continue to contribute to higher organic growth.
It started the year at $1.68 and now $2.05 at time of writing giving us a 22.0% gain in capital appreciation excluding dividends. At its 2019 high, it was trading at close to $2.10.
We think from here, upside may be limited until the Fairprice AEI is completed and are locking in 50% of the gains first and wait and see. We think acquisition could be on the cards for this REIT from its sponsor’s pipeline which could be yield accretive – Mapletree Business City II perhaps? But until then, the current gains are just too hard to resist.
We are on the view that after this run-up in the REITs over the last 3 to 6 months, the upside gains on the larger market cap Singapore REITs may be limited. Therefore, it would be prudent to lock it some of these gains during this portfolio review and rotate them into other REITs both Singapore and overseas where valuations are far more reasonable. We like REITs in the Hong Kong, Australia and US markets.
Below are some of the Singapore listed REITs where we have reallocated or thinking of reallocating some of our capital to ride the next 1 to 3 year of potential growth.
This REIT has been beaten down severely in the last 5 years, but it has now had a change in management. We observe that the management is taking a lot of pro-active steps to engineer a turn-around. Its share price has also been very stable over the last few quarters and we think the downside is likely limited.
This is would be an interesting turnaround play for us.
After tracking this REIT for 3 quarters since its IPO, we are convinced that it is well positioned to ride the growth of rising spending power of the Chinese middle class. Its business model is not easily copied by a competitor and its short leases serve an important role in allowing the management to constantly flush out poor performing tenants and replace them.
This is an interesting growth play for us. We have previously written about why we had invested in Sasseur REIT.
Most readers will be no stranger to this REIT. After the Lippo Karawaci saga, First REIT has been beaten down to the lowest price it has ever been in the last 5 years. While there is still a large overhang due to poor sentiments around its sponsor, we think that most of the risk is alleviated with Lippo Karawaci’s recent fund-raising proposal. But for the stock prices to move in the next 1 year, institutions will need to also see this as a turn-around play, many which may still take a wait-and-see approach to observe the issues within Lippo Karawaci.
We personally think that First REIT likely has a good 1 to 2 years of upside including dividends from its current price. Investors should still be aware of the risk surrounding First REIT’s rental renewals in 2021.
Since IPO, Manulife has been making significant acquisitions in the grade A US office spaces with very high growth and rental reversions. We like the quality of assets that they have been adding which has been DPU accretive – including its latest acquisition of Centrepointe.
Just late last year, it’s stock was hit badly due to fears of the US tax issues which we have also written about. That would have been an excellent time to be loading up on this REIT.
A lesser followed REIT in Singapore but owns a significant portfolio or sub-urban malls in Hong Kong. We like how they show constantly high rental reversions giving them strong organic growth and supported by a dense surrounding population. Investors should be aware that this REIT will be delisted.
A rare situation where a REIT IPO was not fully subscribed which caused an overhang on the stock price after the stock was transacted at 10% below the IPO price. It was also unfortunate that the timing of the IPO was so close to another US Hospitality REIT – ARA US Hospitality REIT.
At this moment, there has been much concerning and lack of understanding around its major asset, The Queen Mary – this has resulted in an overhang on its stock price due to poor sentiments. The yield however has risen sharply.
The only way this REIT can turnaround is to consistently outperform its IPO forecast and surprise the markets.
Using various metrics such as overall market P/B Ratio and Yield Spread and comparing it to historical trading ranges, we can see that the Singapore REIT market is trading at valuations that are in the higher end of the spectrum over the last 5 years.
We do not believe in holding positions forever and our investment philosophy is to lock in gains at the appropriate time, maintain a pool of cash reserves and then re-enter the market again when it gives better value.
A periodic portfolio review such as this is healthy as we rotate some gains into other REITs which could give us a higher upside.
While we may be locking it gains in our REITs portfolio this round, it does not mean that we anticipate a crash the REITs market in the near future and should be not be interpreted as such. We are simply of the view that for many of our specific REITs that have run up, we think that the upside gains at this value is limited.
It would be more prudent for us to recycling our capital into other potentially higher growth REITs.
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Meanwhile, do also check out the book REITs to Riches: Everything You Need to Know About Investing Profitably In REITs available at all major bookstores around Malaysia and Singapore. To purchase the eBook (PDF) copy, navigate to http://aktive.com.sg/store/reits-to-riches/.
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