Warren Buffett once said that his favourite holding period is forever. However, finding investments that you could hold on to forever could be a tough task considering how quickly the world is evolving. That said, I do believe I have found two real estate investment trusts (REITs) that could potentially provide market-beating returns for a very long time.
Capitalising on the growing Hong Kong retail market
Fortune Real Estate Investment Trust (SGX: F25U) has been one of the most consistent REITs over the past eight years. This REIT that invests in Hong Kong suburban retail malls has managed to double its distribution per unit (DPU) in just eight years. More importantly, Fortune REIT looks set to continue increasing its DPU over the next few years. There are a few reasons why I believe this is likely.
Last year, Fortune REIT renewed or signed new leases at a rate that was on average 12.7% higher than existing contracts. This double-digit positive rental reversion should increase the rental income in the REIT’s existing portfolio of 16 properties.
In 2018, the largest mall in Fortune REIT’s portfolio, Kingswood, was also in the process of a major facelift. As a result, tenant occupancy at Kingswood dropped to 88.4% from 94.0%. When the Kingswood renovation works are completed by the end of 2019, occupancy should return to normalised levels and could provide another boost to rental income.
Lastly, Fortune REIT is probably one of the most well-placed REITs to make debt-funded acquisitions to drive DPU growth. As of 31 December 2018, Fortune REIT had a gearing ratio of just 20.9%, giving it HK$18.7 billion in debt headroom before hitting the regulatory limit of 45%.
As a unitholder of Fortune REIT, I certainly like what I have seen so far. Fortune REIT does not come cheap though. At the time of writing, its units exchange hands at HK$10.06, which gives it a comparatively low yield of 5.1%. However, with the REIT’s visible growth prospects, I believe investors who board the boat now will likely still be rewarded with market-beating returns in the long term.
Banking on e-commerce
Listed in 2016, EC World Real Estate Investment Trust (SGX: BWCU) is a specialised and e-commerce logistics REIT with seven China properties in its portfolio. In 2018, its gross revenue and DPU increased by 5.3% and 2.6%. In my view, EC World looks set to build on last year’s DPU growth in the next few years.
The REIT has negotiated built-in annual rental escalations in most of its properties. In addition, it also announced a proposed entry into new master lease arranges at three of its properties. The extended agreement will have built-in rental escalations of 1% to 2% that will extend up to 2025. These rental escalations provide the REIT with visible organic rental income growth at its existing portfolio.
On top of organic growth, EC World has the financial muscle to reward unitholders with DPU-accretive acquisitions. The REIT has a gearing of just 31.5%, some way below the 45% regulatory limit. In April 2018, it flexed some of its financial muscle to acquire Wuhan Meiluote, an e-commerce logistics property. This demonstrated that the EC World is not afraid to tap into the debt market to fund its growth.
If all of this does not convince you, consider its yield. At the time of writing, EC World REIT units exchange hands at S$0.775, which translates to a price-to-book ratio of 0.90 and an attractive distribution yield of 7.9%.
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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 units of EC World Real Estate Investment Trust and Fortune Real Estate Investment Trust.