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Does Ascendas India Trust Make a Good Investment?

Ascendas India Trust (SGX: CY6U) is the first trust listed in Singapore that focuses on investing in real estate in India. As of 30 June 2018, it owns a portfolio of seven IT parks and six warehouses in prominent cities in India such as Mumbai, Chennai and Bangalore. A recent report by Singapore Exchange Limited (SGX: S68) also showed that Ascendas India Trust was the second best performing REIT so far this quarter, with a return of 9.9% from 29 June to 7 September.

With that in mind, here are two factors to consider when investing in Ascendas India Trust

Potential earnings catalysts

Ascendas India Trust has been aggressive in its bid to grow the trust through acquisitions and development of its existing space. In May this year, Ascendas India Trust agreed to purchase two buildings in Mumbai and two in Hyderabad. In total these four buildings consist of 3.2 million square feet of leasable area.

The trust has also received the approval to redevelop one of its IT parks (“The V”) that will potentially increase the leasable area by 3.0 million square feet over the next decade. In Bangalore, Ascendas India Trust is in the midst of construction of two new buildings with a total leasable area of 1.2 million square feet.

In total, these acquisitions and new developments will increase the leasable area by 58.7% from 12.6 million square feet to 20 million square feet.

As most of these developments and acquisitions have been funded by debt, it is expected to be yield-accretive. Currently, Ascendas India Trust has a gearing ratio of 31%, which gives it around S$523 million in debt headroom to fund further acquisitions of developments if the opportunity arises.

Real estate firm CBRE has said that it expects rental rates to improve in Bangalore and Hyderabad, which will provide Ascendas India Trust with an extra organic income boost.

Potential stumbling blocks

The main reason for the volatility in Ascendas India Trust’s distribution per unit in the past was the weakening Indian Rupee against the Singapore dollar. Since its listing in 2007, the Indian Rupee has plummeted 47%. As Ascendas India Trust earns its rental income in Indian Rupee but pays out its distribution in Singapore dollar, the lower exchange rate has negatively affected distributions. The chart below illustrates its DPU trend over the years in comparison with the relevent exchange rate.

Source: Ascenadas India Trust FY17/18 Q4 Earnings Presentation

As you can see, DPU was negatively affected when the Indian Rupee declined substantially between 2008 and 2014. This resulted in the inconsistent DPU trend over the years. Going forward, there is a risk that the Indian Rupee will continue to slide against the Singapore dollar and, in turn, affect distributions.

Ascendas India Trust also sports a high valuation. At the trust’s current price of S$1.12, it trades at 22% premium to its book value and has a dividend yield of 5.5% which is below the average distribution yield of 6.7%. The market has high hopes for it, and any stumble could negatively affect its price.

The Foolish bottom line

There are certainly good reasons to be bullish about Ascendas India Trust. It has planted seeds of growth and the outlook for India’s rental market looks healthy. However, investors should also take note of how the exchange rate fluctuations has affected its distributions in the past. If the Indian Rupee continues to weaken, distributions and consequently, its unit price might be affected.

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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.