2018 was a bad year for real estate investment trusts (REITs). Rising interest rates and geopolitical uncertainties resulted in sharp declines in many REITs listed in Singapore. However, this is actually great news for long-term investors. While it is easy to get disheartened in a time of crisis, a market downturn presents an opportunity to invest in cheap securities that now offer much higher yields. With that, here are two REITs that have more than 8% yields that you can consider buying in 2019. Banking on e-commerce First on the…
2018 was a bad year for real estate investment trusts (REITs).
Rising interest rates and geopolitical uncertainties resulted in sharp declines in many REITs listed in Singapore. However, this is actually great news for long-term investors. While it is easy to get disheartened in a time of crisis, a market downturn presents an opportunity to invest in cheap securities that now offer much higher yields.
With that, here are two REITs that have more than 8% yields that you can consider buying in 2019.
Banking on e-commerce
First on the list is EC World Real Estate Investment Trust (SGX: BWCU), a REIT that invests in specialised and e-commerce logistics real estate in China. The REIT had strong growth in the third quarter of 2018. Its distributable income and DPU grew by 10.0% and 9.0% respectively, as the REIT benefitted from lower expenses and the absence of a withholding tax charged in 2017.
There are two key reasons why I believe EC World REIT has the potential to continue rewarding unitholders with higher distributions in the future.
First, the REIT’s existing portfolio has the propensity for higher rental income. The management has negotiated built-in rental escalations with most of its key tenants, ranging from 1% annual rental escalation to 10%. These built-in rental escalations can provide the REIT stable and visible organic income growth.
Secondly, EC World REIT has one of the lowest gearing ratios among REITs listed in Singapore at just 30.7%. This affords the REIT the financial flexibility to take on more debt for acquisition growth if the opportunities arise.
If these characteristics do not convince you, then consider its valuation. At its current price of S$0.70 per unit, EC World REIT trades at a 20% discount to its book value and has a yield of 8.7%. While there are currency risks associated with China-focused REITs, EC World REIT’s cheap valuation, low gearing, and stable existing portfolio make it a risk worth taking.
Health is wealth
First Real Estate Investment Trust (SGX: AW9U) is a healthcare REIT that focuses its investments in Indonesia. It is joint sponsored by Indonesia property giant Lippo Karawaci Tbk and Singapore-listed OUE Lippo Healthcare Ltd (SGX: 5WA).
In a dramatic two-day spell in November last year, First REIT’s unit price plunged by more than 15%. The plausible reason for the large drop in price was the downgrade of its Indonesia sponsor’s credit rating by two notches. As Lippo Karawaci is also a key tenant in First REIT’s portfolio, investors were concerned that Lippo Karawaci might default on its rental payments.
However, in my view, the steep and sudden sell-off looks to be massively overdone and represents a great opportunity to buy units in the REIT. The downgrade of Lippo Karawaci does not necessarily mean that it will be unable to meet near-term obligations. In fact, I believe it is actually quite unlikely that Lippo will not be able to pay its rental obligations.
While First REIT’s unit price has recovered a little since then, it still trades well below its 52-week peak. At the time of writing, First REIT units are changing hands at S$1.05 per unit, which translates to a 4% discount to book value and a tasty 8.3% yield.
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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 owns shares in First Real Estate Investment Trust and EC World Real Estate Investment Trust. Motley Fool Singapore has a recommendation for First Real Estate Investment Trust.