How To Valuate a REIT and Tell If It’s Worth Buying

| May 22, 2013 | 0 Comments

singapore reit investment Whenever you want to invest in a particular financial product, you have to realize ways on how to valuate the the product in question. These days, within the Singapore financial markets, REITs have gained considerable popularity because of their high performance and consistent growth. Since REITs provide a higher yield as compared to other similar financial equity-based instruments and are also fairly liquid, they are popularly considered to be attractive investments for both small and large investors.

Asset Mix

The first rule associated with investing in REITs is to understand the right type of asset mix, as this determines how an REIT will perform under specific types of economic conditions. REITs can be classified as commercial, industrial or retail. Each sector of the real estate market will essentially respond in a different manner to whatever economic conditions it is subjected to. Depending upon the nature of the investor, REITs can be either defensive or aggressive. Undoubtedly, an aggressive REIT will have the potential to bear more fruit although it will also represent increased risk.

From an overall point of view, retail REITs are quite stable and can provide consistent yield. The reason behind this is simple; retail REITs demand is not impacted greatly by economic slumps. Even during economic downturns, the demand related to retail space and occupancy rates are quite high. However, the only disadvantage with this type of REIT is that rental income is considerably lower which is why the annual yield will be lower as compared to other similar REIT products.

Moreover, investors must also consider the type of retail REIT they may be interested in. For example, suburban REITs that are located next to highly populated residential areas are not really impacted by a slump within the economy. In regards to Singapore, if you consider Fraser Commercial Trust, you will see that their properties are located next to suburban areas. Consequently, the annual yield that they provide is quite consistent. On the other hand, Starhill Global with properties in downtown Singapore, have rates that fluctuate much more, considering the fact that they are nowhere near suburban areas.

If you consider commercial REITs, it is evident that they provide a higher yield than retail REITs, but they also represent increased risk since they can be greatly impacted by economic downturn. For investors who are looking for higher yields, industrial REITs are the best option. However, since the demand and rental income of industrial REITs is impacted greatly by the economic condition of the country, they can be the riskiest type of REIT. One sensible method of ensuring consistency in regards to industrial REITs is to look for the ones that provide longer lease agreements – a 3-month lease agreement is not that ideal, whereas a five year lease agreement is great.

Lastly, investors should also consider the reputation and performance of the management board of the REIT. A good way of gauging this repute is to consider the increase or decrease in the performance of an REIT by the addition of new assets. This performance can be gauged quite accurately if you look at the value that has been added to the dividend payout rate after a property asset has been added to the REIT’s portfolio.

Other Factors To Valuate REITs

One of the best ways to value a REIT is to consider its NAV or Net Asset Value. The NAV of any REIT is its price per share value within the market. For an REIT, it is calculated by subtracting liabilities from assets within the REIT’s portfolio. Therefore, an NAV for an REIT is actually an overall reflection of the market price of all of the assets that it comprises of and can provide an accurate estimate of the total value of the REIT. Suntec, a renowned REIT within Singapore currently has an NAV of $2 whereas it has a gearing ratio of about 36.7%. The gearing ratio of an REIT is a measure of the percentage that comprises of owner’s equity with the percentage that comprises of debt.

Compared to Suntec, CapitalMall Trust has an NAV of $1.6, but its gearing ratio is the same as Suntec’s. Therefore, from an investment point of view solely based on NAV, an investor would look more favourably towards Suntec.

Another factor to gauging the value of an REIT is by comparing its dividend yield with other yields of comparable products. For example, the Singapore Government is rated AAA which means that the bonds that it provides have almost zero risk. Therefore, an investor purchasing Singaporean Government Bonds would almost always have the surety of being provided with a certain yield each year.

However, with REITs, an investor would be facing a certain amount of risk for which he or she would also enjoy a higher yield. Although REITs have and continue to perform quite well within the Singapore financial sector, it would be prudent to valuate a REIT appropriately and understand that it is not a guarantee that you will make money investing in REITs.

Category: REITs

About the Author ()

John Tan has been Vice President of BlueTrust Investments Corporation for 6 years since the mid-90’s. He has since moved on, to be a professional full-time trader.

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