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Here Are 2 Billion-Dollar REITs With Distribution Yields Of Around 7% Right Now

Real estate investment trusts, or REITs, are popular investment choices in the Singapore stock market. That’s because REITs tend to have high dividend yields (technically, a REIT’s dividend is known as a distribution – but let’s not split hairs here!) due to their need to distribute up to 90% of their taxable income to unitholders in order to enjoy tax transparency.

In this article, I want to share two REITs with distribution yields of around 7% right now. The duo – CapitaLand Retail China Trust  (SGX: AU8U) and Frasers Commercial Trust  (SGX: ND8U) – also have market capitalisations of over S$1 billion each.


Source: SGX Stock Facts

CapitaLand Retail China Trust, as a quick introduction, is a REIT that owns shopping malls in China. Its portfolio currently consists of 11 malls in Beijing, Shanghai, Guangzhou, Chengdu, Wuhan, Hohhot, and Zhengzhou.

In its latest earnings update, for the second quarter of 2018, CapitaLand Retail China Trust reported that its gross revenue for the quarter had declined by 4.6% year-on-year to S$56.3 million, while net property income was reduced by 5.9% to S$37.6 million.

The lower net property income was due to the sale of CapitaMall Anzhen on 1 July 2017 and lower contributions from CapitaMall Grand Canyon and CapitaMall Minzhongleyuan. Contributions from Rock Square, which is accounted for under the share of results (net of tax) from joint ventures, helped provide an offset. So despite reporting lower net property income, CapitaLand Retail China Trust’s distribution per unit (DPU) for the quarter inched up by 0.8% year-on-year to 2.64 cents.

As of 30 June 2018, the REIT’s gearing stood at 32.1%, which is comfortably lower than the regulatory gearing limit of 45%. Meanwhile, its committed occupancy rate was at an acceptable 97.4%.

In its latest earnings update, CapitaLand Retail China Trust gave the following useful comments on its outlook and the state of the China retail market:

“In 2Q 2018, China’s GDP registered a stable growth of 6.7%1 year-on-year to RMB41.9 trillion, signifying a good momentum for 2018 as the national economy moves towards high-quality development. National retail sales increased 9.4% year-on-year to RMB18 trillion, while national urban disposable income and expenditure per capita grew 8.7% and 6.8% respectively.

China’s retail landscape is decentralising as new retail zones are created to cater for developing residential areas. In 1Q 2018, new retail supply slowed with a total of 780,000 sqm of new stock added whereby more than 80% was located in submarkets or emerging areas.

Notwithstanding the short-term volatility arising from current political sentiments, CRCT’s portfolio of family-oriented malls remains well-positioned to tap on continued urbanisation, China’s transition towards a consumption-based economy, as well as the rising affluence of a growing middle-class segment and higher-spending millennials.”

Next up we have Frasers Commercial Trust, a REIT that focuses primarily on commercial properties. It currently has ownership stakes in six commercial properties located in Singapore, Australia, and United Kingdom. Its properties in Singapore include China Square Central and Alexandra Technopark.

Frasers Commercial Trust’s latest earnings update was for the third quarter of its financial year ending 30 September 2018 (FY2018); the reporting period was for the three months ended 30 June 2018. For the reporting quarter, Frasers Commercial Trust experienced a 15.2% year-on-year decline in gross revenue to S$32.5 million, and a 26.9% fall in net property income to S$20.4 million. However, distribution to unitholders climbed 10.4% to S$21.2 million while distribution per unit (DPU) remained flat at 2.40 cents.

The REIT attributed its lower net property income to lower occupancy rates for its Singapore properties, two of its Australian properties (Central Park and 357 Collins Street), and an average weaker Australian dollar compared to the Singapore dollar.

On 10 July 2018, Frasers Commercial Trust announced the sale of one of its Singapore properties – 55 Market Street – for S$216.8 million. The deal was completed on 31 August 2018. Jack Lam, the CEO of Frasers Commercial Trust’s Manager, shared the following comments in the REIT’s latest earnings update on the divestment of 55 Market Street:

“55 Market Street is the smallest of our assets and is non-core. Monetizing the asset at a gain of close to S$67 million above valuation and almost tripling the initial purchase price unlocks significant value. It also creates opportunities for us to recycle capital to higher-yielding investments and other initiatives as we continue to reshape and strengthen the portfolio for long-term growth.”

As of 30 June 2018, the REIT’s gearing stood at 35.4%, which is a comfortable distance from the regulatory gearing limit. Its committed occupancy rate, however, was low at 81.9%.

In its latest earnings update, Frasers Commercial Trust also shared useful comments on the state of the various property markets in Singapore that it is in. Singapore accounted for 55% of the REIT’s total asset values in the reporting quarter. Here are the comments:

“For the office market, CBRE reported that market fundamentals have strengthened and island-wide vacancy remained tight at 5.9% in 2Q 2018. As at end 2Q 2018, average rents increased 4.1% qoq to S$10.10 per square feet (“psf”) per month for Grade A CBD Core, 2.6% qoq to S$7.80 psf per month for Grade B CBD Core and 2.1% qoq to S$7.25 psf per month for island-wide Grade B. According to CBRE, demand for space mainly stemmed from flexible space operators, technology firms and insurance companies. CBRE is of the opinion that the medium-term outlook for rents is positive with the tapering future supply.

For the business park market [in Singapore], CBRE reported that leasing activity and interest in business park space registered an upswing in 2Q 2018. Island-wide net absorption turned positive to 74,408 sf in 2Q 2018 which led to a reduction in vacancy to 11.6% from 12.0% in 1Q 2018. Demand was mainly attributed to tenants seeking expansion or relocation space and driven by the relatively more affordable business park rents compared to office rents.

City fringe business parks of higher quality and better locations continue to be in demand. As at the end of 2Q 2018, the average rent increased 0.9% qoq to S$5.70 psf per month for city fringe business parks and 1.4% qoq to S$3.75 psf
per month for the rest of the island. CBRE is of the opinion that rents for city fringe business parks are expected to grow as vacancy remains tight.”

A Foolish conclusion

Investors should be reminded, however, that CapitaLand Retail China Trust and Frasers Commercial Trust’s high distribution yields alone are not enough to justify an investment. It is important the investors carry up their research on the REITs’ future prospects before committing any capital.

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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 a recommendation for CapitaLand Retail China Trust.