Real estate investment trusts in Singapore’s stock market aren’t given much love by investors lately, judging from the fact that many of them are trading near 52-week lows. Challenges that REITs in general are facing are well-known: There’s Singapore’s slowing economic growth; an increase in interest rates; and, for some property sectors at least, overcapacity issues. But, these challenges have also managed to bring something positive to investors: There are many REITs now with distribution yields of over 7%. A word of caution here is warranted. A high yield, on its own, is not a sufficient reason to justify an…
Real estate investment trusts in Singapore’s stock market aren’t given much love by investors lately, judging from the fact that many of them are trading near 52-week lows.
Challenges that REITs in general are facing are well-known: There’s Singapore’s slowing economic growth; an increase in interest rates; and, for some property sectors at least, overcapacity issues.
But, these challenges have also managed to bring something positive to investors: There are many REITs now with distribution yields of over 7%.
A word of caution here is warranted. A high yield, on its own, is not a sufficient reason to justify an investment. A REIT with a high yield may have an unsustainable distribution; in such an instance, a high yield is as good as a low yield.
That being said, a pool of high-yielding REITs can still be a good place to hunt for potential investment ideas that are worth a deeper study.
Let’s take a look at three REITs I’ve chosen at random from a list of REITs with distribution yields of over 7%: CDL Hospitality Trusts (SGX: J85), CapitaLand Retail China Trust (SGX: AU8U), and Frasers Hospitality Trust (SGX: ACV).
Source: SGX Stock Facts
CDL Hospitality Trusts is not just a REIT – it is a stapled trust that consists of a REIT and a business trust. As its name suggests, CDL Hospitality Trusts has a focus on hospitality assets and owns a total of 15 hotels, two resorts, and a retail mall (as of 30 September 2016). These properties have 4,911 rooms in all and are spread over Singapore, Australia, Japan, New Zealand, the United Kingdom (UK), and Maldives.
The trust recently reported its 2016 third-quarter earnings and saw its quarterly gross revenue climb 10.5% to S$45.4 million. This drove a 5.3% increase in the trust’s net property income to S$34.8 million and subsequently, a 3.4% uptick in its distribution per stapled security to 2.44 cents.
Singapore is by far CDL Hospitality Trust’s largest geographical source of revenue. In the trust’s earnings release, it commented that the “environment for hotels is expected to remain competitive as a result of the subdued economic environment.”
CapitaLand Retail China Trust is next in line. The REIT owns shopping malls in China and currently has 11 malls in its portfolio. As of 30 September 2016, CapitaLand Retail China Trust has total assets of S$2.7 billion.
In the REIT’s latest earnings release (for the quarter ended 30 September 2016), it reported an 8.5% year-on-year decline in gross revenue to S$50.6 million. Net property income followed suit with a 6.9% fall. The REIT’s distribution per unit (DPU) fell the hardest – it came in at 2.36 cents, 10.6% lower compared to a year ago.
Unfavourable currency fluctuations (the renminbi had lost 8.1% in value compared to the Singapore dollar over the last 12 months) had dinged the REIT’s numbers.
The market environment for the REIT appears to be growing. In its earnings release, CapitaLand Retail China Trust commented that retail sales in China in the first nine months of 2016 had “expanded 10.4% year-on-year to RMB23.8 trillion.” It added that “urban disposable income and expenditure per capita grew 5.7% and 5.3% year-on-year respectively.”
We’re down to Frasers Hospitality Trust, which in a similar manner to CDL Hospitality Trusts, is a stapled trust that comprises both a REIT and a business trust. Frasers Hospitality Trust has 15 properties in its portfolio right now and they are located across nine cities in Asia, Australia, and Europe.
During the quarter ended 30 September 2016, the trust experienced an 8.6% year-on-year increase in gross revenue to S$33.5 million. Net property income jumped even more – by 11.5% – to S$28.6 million. But, the trust’s distribution per stapled security actually fell by 9.4% from a year ago to 1.19 cents.
One of the reasons for the lower distribution per stapled security is the October 2016 rights issue that enlarged Frasers Hospitality Trust’s securities count. That said, the trust’s distributable income did fall by 2.6% to S$21.9 million.
Frasers Hospitality Trust’s three largest geographical markets are, in order of size, Australia, Singapore, and the United Kingdom. Collectively, they accounted for 77% of the trust’s total gross revenue in the third-quarter of 2016.
In Australia, the trust thinks that new supply entering the market in the next 12 to 24 months should be able to be absorbed by “existing infrastructure developments such as the Sydney International Convention Centre and Barangaroo.”
As for Singapore, “the weak global economic outlook, moderating growth in China, increasing regional competition and supply of new rooms will continue to weigh on the hospitality sector.”
Coming to the UK, Frasers Hospitality Trust commented that “following Brexit, the weakened pound has led to an increase in overseas visitors to London but this may be masked by the impact that future negotiations on Brexit could have on business investment and consumer confidence.”
A Foolish conclusion
The three trusts mentioned above may have fat distribution yields. But it is worth noting that the yields alone tell us nothing about whether they can sustain their distributions going forward. Investors need to dig into the REIT’s fundamentals before coming to any investment decision.
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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 Lawrence Nga doesn’t own shares in any companies mentioned.