Since debuting in Singapore back in 2002, REITs have become popular investment vehicles for income hungry investors. Besides their consistent distribution payout, REITs also provide liquidity, exposure to real estate and the propensity for capital growth.
However, REITs have their own set of risks. As REITs are highly leveraged securities, they can be affected by interest rate hikes. If a REIT is overstretched, it can result in liquidity issues, and negatively affect distribution and investor return.
With that in mind, here are three REITs that have the highest debt-to-asset ratio right now.
Soilbuild Business Space REIT (SGX: SV3U) invests primarily in business parks and industrial properties in Singapore.
In its latest quarter, its headline numbers were disappointing, with net property income and distribution per unit (DPU) down 12.4% and 13.8% respectively. In the longer term, it has also failed to deliver any meaningful growth in DPU as competition in the Singapore office market has hampered rental growth.
Soilbuild Business Space REIT currently has a gearing ratio of 37.6%. This puts it quite close to the 45% regulatory limit, set by the Monetary Authority of Singapore (MAS). Worse still, its loans have a weighted average term of maturity of 2.3 years, which is a relatively short time frame and exposes the REIT to the risk of incurring higher interest rate expense in the future.
At the time of writing, units of Soilbuild Business Space REIT trade at S$0.575 per piece, giving a price-to-book ratio of 0.9 and a trailing distribution yield of 9.2%.
IREIT Global (SGX: UD1U) is the next REIT on the list. It has a portfolio of five office buildings in Germany. As of 30 June 2018, the trust had a gearing ratio of 38.6%, giving it one of the highest gearing ratios in Singapore. Even though it has a high interest cover (a measure of net property income against interest expense; the higher the better) of 8.5 times, an increase in interest rate levels in the future might have an impact on its bottom line due to its high debt load.
Units of IREIT Global are trading at S$0.75 per piece.This translates to a price-to-book ratio of 1.1 and a distribution yield of 7.8%.
Viva Industrial Trust (SGX: T8B) completes the list with a gearing ratio of 41% and an interest cover of 4.38. Like Soilbuild Business Space REIT, it also has a short debt maturity profile, with average maturity at just 2.0 years. However, there could be some good news for unitholders as Viva Industrial Trust and ESR-REIT (SGX: J91U) have proposed a merger. The combined REIT would be the fourth largest industrial REIT in Singapore and will have a lower gearing than what Viva Industrial currently spots.
As of the time of writing, units of Viva industrial Trust trade at S$0.89 each, a 17% premium to its book value. The trust has a trailing distribution yield of 8.4%.
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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 owns shares in any companies mentioned.