Real estate investment trusts (REITs) have been performing well in the last five years, beating the broader stock market index by around five percentage points. However, not all REITs have performed equally well. Some have lagged behind their peers, while others have outperformed considerably. As investors, we are always striving to find the best investment to grow our wealth and looking for these outperformers can make a huge difference.
With that in mind, I would like to point to three characteristics of a REIT that I look for when investing.
Consistently high occupancy rate
A high occupancy rate means that the REIT can lease out most of its leasable area and can maximise the return on its properties. A REIT that can consistently maintain a high occupancy rate over many years shows the strength of the management team in utilising its assets and maintaining a healthy relationship with its tenants.
The stable occupancy rate also makes revenue more predictable, and investors can be assured of sustainable and stable dividends.
Price-to-book ratio below one
The price-to-book ratio compares the price of a unit of a REIT with the book value per unit. As investors, we should look for REITs that are trading below its book value.
Because the book value of REITs is mostly made up of properties, it is a good indicator of how much unitholders would get back should the REIT decide to liquidate its assets. A low price-to-book ratio will reduce the risk of any losses should the REIT fold.
A strong management team
Managing a REIT takes skill and experience. As such, not every management team can do a good job. As investors, we need to ensure that our investments are in safe hands. However, how do we know if the management team is reliable and skilled?
A good way to assess a management team is to simply do a quick Internet search on the members of the team and look out for any red flags, such as previous misdeeds or fraud. Good indicators of a strong manager are having experience in the industry, having a clean track record and having a proven ability to grow the REIT.
The Foolish bottom line
On average, REITs in Singapore have performed admirably. However, not all REITs have done equally well. Some have only returned 5% a year, while others have returned more than 20% a year. Obviously, that is a huge difference and finding the high performing gems can make a big difference to our portfolio. Hopefully, this article gives us a good stepping stone to finding those REIT darlings that can help grow our portfolio even more.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.