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The Better Commercial REIT Now: CapitaLand Commercial Trust vs. Keppel REIT

When it comes to real estate investment trusts that have a focus on Singapore offices, two of the bigger ones would be CapitaLand Commercial Trust (SGX: C61U) and Keppel REIT (SGX: K71U).

The former currently has a market capitalisation of S$4.2 billion and has a portfolio of 10 prime commercial properties in Singapore along with some small investments in Malaysia. As for the latter, it has a market capitalisation of S$3.4 billion and although it has eight office properties in total spread across Singapore and Australia, 90% of its portfolio’s value resides in its Singapore properties.

Given their size and similarities, the individual investor who’s out looking for exposure to commercial REITs may wonder: Would CapitaLand Commercial Trust or Keppel REIT be the better REIT right now?

There are many important things for investors to study before the question above can be answered, but let’s just focus on three aspects of the REIT’s fundamentals here: Their financial strength, track record of growth, and valuation.

Financial strength

REITs are investment vehicles that basically borrow money to buy properties. There’s nothing wrong with debt, but its presence creates risk for investors. With this in mind, here’s how CapitaLand Commercial Trust and Keppel REIT stack up:

CapitaLand Commercial Trust and Keppel REIT balance sheet
Source: REITs’ earnings presentation (for first-quarter of 2016)

CapitaLand Commercial Trust has a much stronger balance sheet by virtue of its lower gearing ratio and fatter interest cover ratio.

Track record of growth

Although REITs are often popular investments for income, capital appreciation can be an important source of returns too. One of the key drivers for a REIT’s units to appreciate in price would be the growth of its net asset value and distributions on a per unit basis – the changes in these metrics are good proxies for the changes in a REIT’s underlying economic worth.

The following chart illustrates changes in the two metrics for CapitaLand Commercial Trust and Keppel REIT over the past five years from 2010 to 2015:

CapitaLand Commercial Trust and Keppel REIT's growth in book value per unit and distribution per unit (DPU) from 2010 to 2015
Source: S&P Global Market Intelligence

As you can see, CapitaLand Commercial Trust has the far better track record here. Its net asset value per unit and distribution per unit had grown by a total of 17% and 10%, respectively, in the time frame we’re looking at. In comparison, Keppel REIT’s book value per unit had shrunk by 2% while its distribution per unit had climbed by just 7%.

Valuation

Even the best businesses can become a lousy investment if its price tag is too high. This is where valuations come into play. In the case of Keppel REIT, it is valued at 0.7 times its latest book value of S$1.48 per unit at its current unit price of S$1.04. This is only slightly lower when compared to CapitaLand Commercial Trust, whose S$1.425 unit price and S$1.74 book value gives rise to a price-to-book ratio of 0.82.

A Fool’s take

In sum, CapitaLand Commercial Trust appears to be the stronger REIT because of its stronger balance sheet and better track record of growth.

But, it’s worth keeping in mind the fact that what we’ve seen about CapitaLand Commercial Trust and Keppel REIT here should not be taken as the final word on their investing merits. A study of their balance sheets, historical growth numbers, and valuations are important, but it does not tell the whole story. Deeper research is needed before any investing conclusion can be reached.

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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 writer Chong Ser Jing doesn't own shares in any companies mentioned.