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3 Factors to Consider When Analysing a REIT

Real estate investment trusts (REITs) have been a popular investment choice of late. REITs offer investors exposure to real estate but are less capital intensive and more liquid investments than buying your own property. REITs in Singapore have also proven to be good investments of late, returning more than 10% returns per annum over the last five years.

If you wish to invest in REITs, you should familiarise yourself with some key aspects of a REIT. Here are three factors that I consider when investing in a REIT.

Property portfolio of a REIT

The property makeup of a REIT is the first factor of consideration when deciding whether to invest in it. What investors should look out for is a property portfolio that is diversified geographically and across multiple sectors. This helps to mitigate any concentration risk.

Another useful way to assess the REIT portfolio is to go down in person to view the properties of the REIT. Investors should look out for properties that are clean, well looked after and multi-tenanted. Ideally, there should be no units left untenanted without a good reason.

Weighted average lease expiry

As investors, we want to know how stable the REIT’s revenue and income will be. The weighted average lease expiry (WALE) is the average number of years till the current lease contracts expire. This figure is usually released to investors during quarterly reports.

WALE is measured by taking into account all of the tenants’ remaining leases. The longer the WALE, the more stable and predictable the rental income of the REIT is.

Gearing ratio

A key factor that I look at when choosing a REIT to invest is the gearing ratio. This ratio tells investors how much debt the REIT has incurred relative to its equity.

A low gearing ratio is essential for REITs that want to expand in the future as they can take on more debt. On the flip side, REITs that are highly leveraged are unlikely to be able to increase their borrowings and hence, cannot expand their portfolio without further equity fund raising.

The Foolish bottom line

REITs, in general, have performed admirably in the past. However, investors should not get complacent and choose any REIT that is offering the highest dividend yield. Instead, we should do our research to find REITs that can sustain their performance over time. To summarise, investors should look for REITs with a diverse property portfolio, a long WALE and low gearing ratio.

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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 Jeremy Chia doesn’t own shares in any companies mentioned.