With real estate investment trusts (REITs) growing in popularity in Singapore, more REITs have chosen to list in Singapore. This has given local investors an embarrassment of options to choose from. But with so many REITs in the market, how do investors find the REIT that will give them the best returns? With that in mind, I want to point to one REIT that I believe is likely to outperform in the next few years. The REIT I am talking about is CapitaLand Retail China Trust (SGX:AU8U). As a quick introduction, CapitaRetail China Trust is a REIT that focuses purely…
With real estate investment trusts (REITs) growing in popularity in Singapore, more REITs have chosen to list in Singapore. This has given local investors an embarrassment of options to choose from.
But with so many REITs in the market, how do investors find the REIT that will give them the best returns?
With that in mind, I want to point to one REIT that I believe is likely to outperform in the next few years. The REIT I am talking about is CapitaLand Retail China Trust (SGX:AU8U).
As a quick introduction, CapitaRetail China Trust is a REIT that focuses purely on China retail malls. It owns a portfolio of 11 malls located in eight different cities in China, including Shanghai, Guangzhou, Beijing and Chengdu. With that, here are four reasons I believe the REIT will deliver strong returns for unitholders in the coming years.
Strong rental reversions
One of the key determinants of how well a REIT will do in the future is rental reversions. Rental reversions is how much the REIT has increased or decreased its tenant rental rates after renewal. A positive rental reversion means that the REIT is able to negotiate higher contracts with its tenants.
In 2017, CapitaRetail China Trust managed a rental reversion rate of positive 5.6%. Out of all its multi-tenanted properties, only CapitaMall Grand Canyon reported a negative rental reversion for the year. Even then, this was only due to a strategic lease initiative. Excluding that, rental reversion for the portfolio would have increased by an even more impressive 6.1%.
High portfolio occupancy
Even though the REIT increased its rental pricing, it still managed to maintain a high occupancy rate. Occupancy rate stood at 95.4% at 31 December 2017. Even more impressive is that this was achieved despite the fact that two of its malls were undergoing tenant mix stabilization, which had led to lower occupancy rates for those particular malls.
Once the tenant mix stabilization process is completed, we are likely to see even higher occupancy rates, and consequently net property income should grow in the process.
Portfolio shopper traffic continues to grow
Growing shopper traffic is crucial to CapitaRetail China Trust’s ability to attract and retain tenants. For the year 2017, the trust oversaw a 4.7% increase in shopper traffic on its existing portfolio.
Once again, this reflects how the REIT has been able to attract the correct mix of tenants to increase the shopper footfall.
Acquisition of RockSquare will fuel further growth
In January 2018, the trust also acquired a 51% stake in Rock Square, a shopping mall in GuangZhou. This new acquisition will only start contributing net property income in the first quarter of 2018, providing the REIT with another avenue to increase its income and ultimately distributions to unit holders.
The Foolish bottom line
CapitaRetail China Trust has a strong portfolio of retail properties that has shown its resilience and ability to attract tenants and shoppers alike. The REIT is also well placed to benefit from the macroeconomic tailwinds that are propelling the Chinese economy. Furthermore, the recent acquisition of Rock Square will further increase the earnings capacity of the REIT, and thereby its ability to pay out more distributions.
Not only that, but the REIT is also trading at a very reasonable valuation. Its current price of $1.56 per unit is just 0.97 times its book value and, with a trailing distribution of 10.1 cents per unit, has an attractive distribution yield of 6.52%. All things considered, I believe investors will be hard-pressed to find another REIT that offers both growth and stability at such an attractive valuation.
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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. The Motley Fool Singapore has a recommendation for CapitaLand Retail China Trust.