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Which of These China-Focused REIT Is the Cheapest Now?

2018 has not been kind to investors of real estate investment trusts (REITs). Interest rate hikes, the ongoing trade conflict in China, and the volatility in emerging market currencies have all contributed to the negative investor sentiment this year.

However, for long-term investors, depressed prices are not necessarily a bad thing. Lower prices mean that investors who are in it for the long haul can find good quality shares at bargain prices.

In this article, I will take a look at three China-based REITs — CapitaLand Retail China Trust (SGX: AU8U), Sasseur Real Estate Investment Trust (SGX: CRPU), EC World Real Estate Investment Trust (SGX: BWCU) — to compare which has the most attractive valuation right now.

Price-to-book ratio

Benjamin Graham, author of The Intelligent Investor and Warren Buffett’s mentor, was a firm believer of buying stocks that traded below their book values. In theory, buying a stock or REIT that sells below its book value is like buying an asset at a price below its resale value. Investors could profit when the market realises the discrepancies between value and price or when the REIT decides to sell its assets and distribute the returns to unitholders. The table below shows the current price-to-book ratio of the three REITs as of 7 December 2018.

Source: Author’s compilation of data from Morningstar and SGX Stockfacts

CapitaLand Retail China Trust and EC World REIT are both trading below their price-to-book ratios compared to last year. Sasseur REIT was listed earlier this year and is also trading at around 15% discount to its initial public offering (IPO) price.

It is also worth highlighting that EC World REIT, with its price-to-book ratio of 0.79, has the lowest price-to-book ratio among the three.

Distribution yield

The distribution yield is another important valuation metric. As REITs are required to pay out at least 90% of their distributable income to unitholders, the distribution yield provides investors with a good idea of how cheap a REIT is relative to its earnings.

Source: Author’s compilation of data from Morningstar and SGX Stockfacts

As shown, both EC World REIT and Sasseur REIT offer an equally high distribution yield of 8.8%, while CapitaLand Retail China Trust has a 7.3% yield.

The Foolish bottom line

Based on observations about its price-to-book ratio and distribution yield, EC World REIT currently has the most attractive valuation. That said, the two valuation metrics are just a small aspect of a REIT. It is also important to see the robustness of its balance sheet, capabilities of its management, capacity for organic growth and other factors to get a wholesome idea of whether a REIT can make a good investment. Only through a thorough analysis of each of these factors will we get a better idea of which REIT has the highest possibility of market-beating returns.

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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 own units of EC World Real Estate Investment Trust. Motley Fool Singapore has recommendations for CapitaLand Retail China Trust.