Are These Office REITs Trading For Less Than What They’re Worth?

The price-to-book (PB) ratio is a popular way to value a real estate investment trust.

The P/B ratio is calculated by dividing the market capitalisation of a REIT with its book value, or net asset value. Theoretically, having a P/B ratio that is less than 1 means that a REIT is trading for less than what it’s worth – an investor who buys the REIT could liquidate all its assets, settle all its obligations, and still end up with a profit.

recent report indicated that the average P/B ratio for Singapore’s REIT universe (the local stock market has 27 REITs and six stapled trusts) was 0.9. The list of 33 trusts included five Office REITs, as defined by the Global Industry Classification Standard.

Here’re four quick highlights from the report on the five Office REITs (figures as of 8 June 2016, unless otherwise stated):

  1. Keppel REIT (SGX: K17U) has a P/B ratio of 0.7. The REIT is home to eight prime commercial properties located in Singapore and Australia and offers a distribution yield of 6.4%. But over the past three years, Keppel REIT has recorded 11% in negative total returns.
  2. Meanwhile, CapitaLand Commercial Trust (SGX: C61U), which has a P/B ratio of 0.8, is another REIT trading in value territory. It owns 10 prime commercial properties in Singapore and some small investments in Malaysia. Over the past three years, the REIT has clocked total returns of 8.5%. CapitaLand Commercial Trust offers a 6.1% distribution yield.
  3. Elsewhere, Frasers Commercial Trust (SGX: ND8U) has a similar P/B ratio to CapitaLand Commercial Trust. The REIT offers a distribution yield of 7.6% and has recorded a total return of 7.3% over the past three years. It also has stakes in six properties located in Singapore and Australia.
  4. Next up is IREIT Global (SGX: UD1U) which houses five commercial properties in Germany. IREIT Global trades at a P/B ratio of 1.1 times. The REIT is a fairly recent initial public offering which debuted in late 2014. The REIT offers an 8.5% distribution yield and has positive total returns of 12.3% over the past year.

The P/B ratio represents a starting point for investors who are looking for REITs that may be undervalued. Valuation, though, has to be complemented by understanding a REIT’s asset quality, the performance of the REIT’s portfolio in the past, and its future prospects, among other important things.

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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 Chin Hui Leong doesn't own shares in any company mentioned.