Real Estate Investment Trusts (REITs) have seen a steep sell-off since the beginning the year. Higher interest rates and concerns over geopolitical issues are two of the reasons why investors have been shunning REITs lately. However, declining share prices are actually good news for long-term investors presents the opportunity to stock up on undervalued REITs which are offering an attractive yield. Sasseur Real Estate Investment Trust (SGX: CRPU) is one such REIT. Sasseur REIT is a China-focused REIT that has a portfolio of four outlet malls. The REIT was listed only at the…
Real Estate Investment Trusts (REITs) have seen a steep sell-off since the beginning the year.
Higher interest rates and concerns over geopolitical issues are two of the reasons why investors have been shunning REITs lately. However, declining share prices are actually good news for long-term investors presents the opportunity to stock up on undervalued REITs which are offering an attractive yield.
Sasseur Real Estate Investment Trust (SGX: CRPU) is one such REIT. Sasseur REIT is a China-focused REIT that has a portfolio of four outlet malls. The REIT was listed only at the start of this year and is, therefore, one of the newer REITs in Singapore. There are three reasons why I believe it can make a good addition to your portfolio.
Propensity for growth
There are two main ways that a REIT can deliver distribution growth to unitholders, namely growth through acquisition or internal growth through better performance from existing assets. Sasseur REIT has the potential to do both.
Sasseur REIT earns its rental income through an entrusted management agreement (EMA), which has a fixed and variable component. The variable component is dependent on tenant sales from its four outlet malls. In the latest quarter, tenant sales in all four of its outlet malls increased from the corresponding period last year. Impressively, the REIT’s Kunming and Hefei outlet tenant sales increased by 90.1% and 60.3% year-on-year, respectively.
The increase in tenant sales shows that the Chinese consumer’s appetite for discounted branded apparel is still strong even as the Middle Kingdom’s economy slows amid global economic concerns. If the sales continue to increase in the future, Sasseur REIT’s rental income will benefit due to the variable component of its EMA contract.
Additionally, Sasseur REIT has the financial capacity to make acquisitions that can increase its distribution per unit (DPU) in the future. The REIT’s gearing (a measure of debt level where a lower figure is better) stands at just 32.5%, which is well below the 45% regulatory limit set for Singapore REITs. Its low gearing provides it with the debt headroom to fund future acquisitions. The REIT currently has two assets where it has the right of first refusal and another three assets in its sponsor’s pipeline that could be potential acquisition candidates.
It is possible that investors are concerned about the slowing Chinese economy and how the US-Chin trade war will impact REITs with assets in the Middle Kingdom. Thankfully for Sasseur REIT, its assets are likely to experience minimal impact from these two overarching concerns.
Outlet malls differ from the normal shopping malls as they sell heavily discounted branded goods. Demand for these products tends to stay strong even in the economy slows down.
In addition, Sasseur REIT’s management believes that the outlet mall space is still growing and is undersupplied, giving the REIT plenty of room for future growth.
There are also certain government initiatives that are designed to keep domestic demand in China up amid the escalating trade war. For example, China’s government is keen to reduce import tariffs on textile goods and to enforce the official overseas free-spending limit of RMB5000. If so, these measures will reduce China middle-class population’s volume of purchased goods from overseas and force them to make their purchases domestically, which is good for outlet malls in China.
Last but certainly not least is Sasseur REIT’s attractive valuation.
The REIT was listed earlier this year at S$0.80 per unit. At that time, units were in high demand with a 3.7 times oversubscription for the public tranche of units on offer. However, Sasseur REIT’s unit price has dipped sharply since its listing and now trades at just S$0.70 per piece.
The REIT is trading at relatively cheap valuations, in my view.
At this price, it spots an annualised yield of 8.6%, among the highest in Singapore and trades at 13% discount to its book value. With the REIT poised for growth and valuations at a considerable discount, it certainly looks like a great time to add units of this undervalued REIT to your portfolio now.
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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 writer Jeremy Chia doesn’t own shares in any companies mentioned.