Real estate investment trusts have long been a popular investment vehicle for Singaporeans. But, not every REIT is a good investment. To start my search for potential REIT investments, I would screen for those with high yields – say 7% or above – and then study them in depth. Some areas I would look out for are the quality of a REIT’s management team, the financial health of the REIT, and the profile of the REIT’s property portfolio. In here, I want to take a closer look at two REITs in Singapore’s market that have yields of over 7%. The…
Real estate investment trusts have long been a popular investment vehicle for Singaporeans. But, not every REIT is a good investment. To start my search for potential REIT investments, I would screen for those with high yields – say 7% or above – and then study them in depth. Some areas I would look out for are the quality of a REIT’s management team, the financial health of the REIT, and the profile of the REIT’s property portfolio.
In here, I want to take a closer look at two REITs in Singapore’s market that have yields of over 7%. The duo, which also have market capitalisations of over S$1 billion each, are: Frasers Commercial Trust (SGX: ND8U) and Ascott Residence Trust (SGX: A68U).
Source: SGX Stock Facts; Yahoo Finance
Frasers Commercial Trust is a REIT that, as its name suggests, focuses primarily on commercial properties. As of 31 March 2017, its portfolio comprises six commercial properties located in Singapore and Australia. In Singapore, the REIT’s properties include 55 Market Street, China Square Central, and Alexandra Technopark.
Frasers Commercial Trust’s latest results (for the quarter ended 31 March 2017) were released in late April. The REIT enjoyed a 4.1% year-on-year increase in net property income to S$30.0 million. This translated to a 2.4% increase in the distribution per unit to 2.51 cents.
The REIT’s higher net property income was due to better occupancy and rental rates achieved in 357 Collins Street (one of its properties in Australia), a one-off payment for the termination of a lease in Central Park (another of the REIT’s properties in Australia), and a stronger Australian dollar.
Looking ahead, Frasers Commercial Trust commented in its earnings presentation that “there is potential for rental growth by end-2017 and a more sustained market recovery in 2018” for the Singapore office market, according to CBRE Research. But, the “recovery is [also] expected to be mixed.” Regarding the Singapore business park market, the REIT said that there “will be a supply gap from 2017 until mid-2018 and this will bode well for occupancy in the medium term.”
As for Australia, demand for CBD (central business district) office space in Perth “is expected to be largely led by consumer and business services sectors.” Meanwhile, the Melbourne CBD market “is ranked in the top five cities globally for forecast rental growth performance over the next three years.”
Ascott Residence Trust is a REIT that focuses on serviced residences and rental housing properties. As of the first quarter of 2017, its portfolio consisted of 90 properties in 14 different countries that collectively have over 11,600 units.
The REIT released its 2017 first quarter results in late April as well. It was a mixed quarter for the REIT as its distribution per unit (DPU) fell by 14% year-on-year to 1.51 cents despite revenue growing by 5% to S$111.3 million.
The lower DPU was mainly due to the absence of currency exchange gains and dilution due to a placement exercise. Meanwhile, the growth in revenue came mainly from the acquisition of the Sheraton Tribeca New York Hotel in 2016 (the acquisition was partly funded by the aforementioned placement exercise).
Since the release of its earnings, Ascott Residence Trust had sold some Japanese properties and acquired properties in Germany and the US.
A Foolish conclusion
The two 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.