One of the more popular types of investments in Singapore is the real estate investment trust. Due to the structure of REITs, they are required to pay out most of their taxable income to their unitholders; this results in them offering high distribution yields for investors. Moreover, since we’re currently in a low interest rate environment, REITs, with their high yields, would seem like an attractive avenue for investors to earn income. But, not every REIT would be a good investment. And with around 40 REITs and stapled trusts (trusts that consist of a REIT and a business trust) in…
One of the more popular types of investments in Singapore is the real estate investment trust.
Due to the structure of REITs, they are required to pay out most of their taxable income to their unitholders; this results in them offering high distribution yields for investors. Moreover, since we’re currently in a low interest rate environment, REITs, with their high yields, would seem like an attractive avenue for investors to earn income.
But, not every REIT would be a good investment. And with around 40 REITs and stapled trusts (trusts that consist of a REIT and a business trust) in our local stock market, it’s important that investors attempt to separate the wheat from the chaff. So, where should we start in our hunt for potential investing opportunities amongst REITs?
In my case, I would start by looking at REITs that are trading at prices close to a 52-week low. From such a list, I would then carry on further research to understand each REIT’s property profile, financials, management-calibre, and future prospects.
Let’s take a closer look at two REITs that currently have unit prices that are near their respective 52-week lows: Soilbuild Business Space REIT (SGX: SV3U) and ESR-REIT (SGX: J91U).
Source: SGX Stock Facts
Soilbuild Business Space REIT is a REIT that invests primarily in business parks and industrial properties in Singapore. Its portfolio has properties such as Solaris, West Park BizCentral, Eightrium @ Changi Business Park, and more.
In its latest earnings update (for the fourth quarter of 2017), Soilbuild Business Space REIT reported that its gross revenue declined by 4.3% year-on-year to S$20.75 million. This dragged its net property income to a 6.0% decline to S$17.75 million, and ultimately led to an 11.9% fall in its distribution per unit (DPU) to just 1.383 cents. The REIT attributed its weaker performance to lower contributions from its 72 Loyang Way property, and higher expenses.
Looking ahead, the REIT sees the supply of industrial properties increasing by 5% by end-2018, before easing from 2019 onward. Colliers also expects industrial property rents “to moderate in 2018 and overall rents to recover 1-3% p.a. in 2019-2021F as supply eases.”
In a bit of positive news, Soilbuild Business Space REIT has a committed portfolio occupancy rate of 92.7% as of 31 December 2017, which is higher than the industrial-average occupancy of 88.6%.
We now come to ESR-REIT, which was previously known as Cambridge Industrial Trust. The REIT’s latest earnings update, which was also for the fourth quarter of 2017, was not good.
During the reporting quarter, ESR-REIT experienced a 2.2% fall in gross revenue to S$27.2 million, but a 1.2% increase in net property income to S$19.9 million. On the distribution front, the REIT’s DPU slipped by 6.7% to 0.929 cents. The larger decline in the REIT’s DPU as compared to the top-line was due to the REIT having to reserve distributions to holders of its perpetual securities.
As a quick introduction, ESR-REIT invests in industrial properties and has a diversified portfolio of 48 properties located across Singapore.
The REIT had the following comments to share on the state of its market in its latest earnings update:
“The overall industrial property market remains soft despite the improved manufacturing outlook. Global uncertainties, rising operating costs and increased supply coming onstream continued to weigh down on rents and occupancy rates.
The Jurong Town Corporation (“JTC”) 3Q 2017 Industrial Property Statistics showed prices and rental of industrial space continued to moderate in tandem with occupancy rates. The overall price and rental indices for the industrial property market fell by 0.9% and 1.1% respectively compared to the previous quarter. With more supply coming on-stream in the coming quarters, downward pressures on the prices and rentals is likely to continue.”
One important recent development with ESR-REIT is the completion of a preferential offering earlier this month which saw it issue 262.85 million new units of itself at a price of S$0.54 per unit. The REIT raised gross proceeds of S$141.9 million from the exercise, of which, S$140.9 million was used to repay some of its borrowings.
At the end of 2017, ESR-REIT had an aggregate leverage ratio of 39.6%. After the repayment of some of its debt as mentioned above, the REIT’s aggregate leverage ratio on 31 December 2017 would have declined to 30.3%, assuming that all else remains the same. It’s worth noting that REITs in Singapore are subject to a regulatory gearing ceiling of 45%, so ESR-REIT’s balance sheet looked really weak prior to the preferential offering.
[Editor’s note: An earlier version of this article incorrectly stated that ESR-REIT’s net property income had declined by 1.2% to S$19.9 million. The error has been corrected in the main body of the article. We’re sorry for the mistake.]
Meanwhile, there are 28 surprising and important things we think every Singaporean investor should know—and we’ve laid them all out in The Motley Fool Singapore’s new e-book. Packed with information and insights, we believe this book will help you be a better, smarter investor. You can download the full e-book FREE of charge—simply click here now to claim your copy.
Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.
The Motley Fool’s purpose is to help the world invest, better. Like us on Facebook to keep up-to-date with our latest news and articles.
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.