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 42 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: Mapletree Commercial Trust (SGX: N2IU) Frasers Commercial Trust (SGX: ND8U) and First Real Estate Investment Trust (SGX: AW9U).
Source: SGX Stock Facts
Mapletree Commercial Trust is the owner of Singapore’s largest mall, VivoCity, together with the PSA Building, Bank of America Merrill Lynch HarbourFront,(MLHF), Mapletree Anson, and Mapletree Business City I(MBC I).
The REIT’s latest earnings update, released in April, was for the fourth quarter of its fiscal year ended 31 March 2018 (FY2018). In the quarter, Mapletree Commercial Trust experienced a 1.3% year-on-year increase in revenue to S$108.9 million, and this led to a similar 1.2% climb in net property income (NPI) to S$84.3 million. The REIT’s distribution per unit (DPU) for the quarter consequently inched up by 0.4% to 2.27 cents.
The growth in the REIT’s revenue and NPI in the reporting quarter was largely due to higher contributions from VivoCity, MBC, and MLHF, which offset declines at Mapletree Anson and PSA Building. For VivoCity and MBC I, the properties had enjoyed rental escalations in its existing leases. The completion of asset enhancement initiatives at VivoCity also helped with its rental-growth. As for MLHF, higher occupancy and rental rates helped it generate more revenue for the REIT. Meanwhile, Mapletree Anson and PSA Building both suffered from lower occupancy.
As of 31 March 2018, Mapletree Commercial Trust’s occupancy rate stood at 99.5% while its gearing ratio came in at 34.5%. Both numbers are great.
Here are some comments on its outlook that Mapletree Commercial Trust shared in its latest earnings update:
“Moving forward, the retail market is expected to benefit from stronger economic fundamentals. However, rental recovery will remain selective and will not be felt evenly across all malls. Landlords will need to focus on enhancing and repositioning their assets to remain relevant…
… The medium term outlook for rents is positive given tapering future supply as new office developments in the immediate horizon garner healthy pre-commitments. On the demand end, there are selective signs of improving business confidence including those from the banking and professional services sectors. The technology sector and flexible space operators, which had been supporting new office demand over the past two to three years, continue to exhibit strong expansionary appetite. However, it remains to be seen if and for how long the office market can continue to rely on them given recent consolidation and M&A activities…
… Business parks in the City Fringe submarket should see rental growth as vacancy tightens further on the back of demand for modern spaces by technology and financial services companies. Comparatively, fundamental quality issues mean relatively dimmer prospects for the Rest of Island submarket in the foreseeable future.”
Next up, we have Frasers Commercial Trust, which focuses primarily on commercial properties. It has ownership stakes in seven commercial properties in Singapore (three), Australia (three), and the United Kingdom.
In contrast to Mapletree Commercial Trust, Frasers Commercial Trust had reported a weaker set of results in its latest earnings update (the update was for the second quarter of its fiscal year ending 30 September 2018; the reporting is for the first quarter of the calendar year 2018).
During the quarter, Frasers Commercial Trust’s gross revenue declined by 18.0% year-on-year to S$33.0 million, while its NPI fell by 26.1% to S$22.6 million. Its DPU was also down by 4.4% to 2.40 cents. Frasers Commercial Trust attributed its net property income decline to lower occupancy rates in a number of its properties, a weaker Australian dollar, and higher expenses for one of its Australian properties, Caroline Chisholm Centre.
In January 2018, Frasers Commercial Trust completed its acquisition of a 50% interest in Farnborough Business Park in London for £87.5 million. Jack Lam, the CEO of the REIT’s manager, shared some comments on the deal in Frasers Commercial Trust’s latest earnings update:
“Farnborough Business Park is an award-winning, high-quality asset with solid fundamentals, and we are delighted to see its accretive contribution commencing from the end of January 2018. We will look to extract further value from the property and grow its income contribution even more going forward.
Farnborough Business Park is also part of Frasers Property Group’s network of business parks totalling more than 3 million square feet in the Thames Valley, which will see it benefitting from economies of scale and other synergistic values afforded by the portfolio.”
Looking ahead, Frasers Commercial Trust thinks that the general outlook for the office market in Singapore “is positive.” The REIT’s view on the business park market in Singapore is similar to Mapletree Commercial Trust’s.
Frasers Commercial Trust ended 2018’s first quarter with a healthy gearing ratio of 35.3%, but a low committed occupancy rate of 83.5%.
Last but not least, there’s First REIT. It currently has a portfolio of 20 properties (16 in Indonesia, three in Singapore, and one in South Korea) that are mostly healthcare-related facilities. The REIT’s sponsor is Indonesia’s largest listed property company, PT Lippo Karawaci Tbk.
For the first quarter of 2018, First REIT reported a 5.8% year-on-year increase in gross revenue to S$28.7 million. The REIT attributed its growth to contributions from the newly-acquired Siloam Hospitals Buton & Lippo Plaza Buton, and Siloam Hospitals Yogyakarta, as well as higher rents from its existing properties in Singapore and Indonesia. Similarly, First REIT’s net property income grew 5.8% to S$28.4 million. The top-line growth led to a 0.5% increase in First REIT’s DPU to 2.15 cents. As of 31 March 2018, First REIT had a solid gearing ratio of 34.1%, which is well below the regulatory gearing limit of 45%.
In its latest earnings update, First REIT had shared the following useful comments on the conditions of its market and business:
“Indonesia achieved a 5.19% year-on-year growth in its gross domestic product for the fourth quarter of 2017, and a growth of 5.07% for the full year, recording the highest growth since 2013.
Consumption, the biggest contributor to Indonesia’s economy, picked up pace in the last quarter of 2017, driving higher growth in the economy. Overall in 2017, Bank Indonesia also provided sustained support to the economy by cutting interest rates eight times. In a bid to reduce the economy’s reliance on consumption as a growth engine, the Indonesian government has rolled out a series of deregulation measures to attract more investment. Bank Indonesia expects the economy to grow 5.10% in the first quarter of 2018.
Demand for private healthcare in Indonesia continues to rise with the growing nationwide adoption of the national health insurance scheme. As such, First REIT remains well-positioned for further growth, with a strong acquisition pipeline of around 40 hospitals in Indonesia from its Sponsor, PT Lippo Karawaci Tbk.”
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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. The Motley Fool Singapore has recommendations on First Real Estate Investment Trust and Mapletree Commercial Trust.