Are These 3 REITs Starting To Look Attractive?

Many stocks in Singapore have been roiled over the past few months and the real estate investment trusts (REITs) are no exception.

Some of Singapore’s largest REITs like Ascendas Real Estate Investment Trust (SGX: A17U)Suntec Real Estate Investment Trust (SGX: T82U), and CapitaLand Mall Trust (SGX: C38U) have all seen their units drop in price since the start of the year.

Ascendas REIT, Suntec REIT, CapitaLand Mall Trust's share price returns

Source: S&P Capital IQ

The good thing for investors is that a lower unit price brings about a better distribution yield.

Ascendas REIT, Suntec REIT, CapitaLand Mall Trust's change in yield

Source: S&P Capital IQ

As you can see, all three REITs are now carrying more attractive yields as compared to the start of 2015. Suntec REIT in particular has seen its yield increase from 4.76% to 6.05%. In all, those three REITs have yields of more than 5.5% each.

Things that can go wrong

It should be noted that a REIT’s yield alone tells us nothing – there’s no guarantee that the REIT’s future distributions will remain at the same level or come in higher.

Here are some danger signs to watch when it comes to the potential for falling distributions:

1. Drop in income

There are signs of Singapore’s economic growth slowing down. If that does come to pass, room for future rental increases for REITs may diminish. Even worse, rents might even decline.

If a REIT is unable to grow the rental rates for its properties at a faster pace than cost increases, its income in the future might be in danger. And with lower income comes lower distributions.

2. More expensive debt

Another risk that REITs face is rising interest rates. Most REITs, including the three featured above, have taken on significant short to medium term debt to finance the acquisition of properties.

If they would have to refinance their borrowings at higher interest rates in the future, their operating costs might surge considerably faster than any rental growth.

Given the weak state of Singapore’s economy as I already mentioned, the chances of rising interest rates may be somewhat lessened (a low interest rate tend to come with a weak economy). But the threat of higher interest rates is still something to keep an eye on.

Foolish Summary

Most REITs – like the three mentioned above – are trading at a more attractive level now as compared to the beginning of the year. But that doesn’t mean investors should dive headfirst into them without understanding the risks involved. It’s important that we always understand what we’re getting ourselves into.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own shares in any of the companies mentioned above.