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3 Cheap REITs in Singapore Currently

According to a recent report by the Singapore Exchange, the iEdge S-REIT Index, which contains 35 real estate investment trusts (REITs), has produced a total return of 12.9% thus far in 2019. Even though the index has produced an enviable performance, some component REITs are still selling below a price-to-book (P/B) ratio of 1 and could be an investment opportunity.

The P/B ratio is calculated by dividing the price of the REIT by its book value per share (also known as net asset value per share).

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In theory, a P/B ratio of less than 1 means the REIT is selling at less than what it’s worth. An investor who buys the REIT could essentially liquidate all of its assets, pay off all debt, and still end up making money.

With that, let’s look at three of the cheapest REITs that are part of the iEdge S-REIT Index (all data as of 16 April 2019).

REIT No. 1

OUE Commercial Real Estate Investment Trust (SGX: TS0U) is the first REIT on the list. The REIT’s portfolio is comprised of four commercial properties located in Singapore and Shanghai, China. In Singapore, the REIT’s assets are OUE Bayfront, One Raffles Place (a 67.95% effective interest), and the office components of OUE Downtown.

The REIT was recently in the news as it proposed a merger with OUE Hospitality Trust (SGX: SK7) to form a S$6.8 billion diversified REIT. Learn more about the proposed merger.

OUE Commercial REIT’s revenue for 2018 inched up by 0.1% year on year to S$176.4 million, while net property income (NPI) was flat at S$138.2 million. The amount available for distribution grew 1.9% to S$71.3 million, but distribution per unit (DPU) tumbled 25.5% to 3.48 Singapore cents. The massive fall in DPU was due to an enlarged unit base arising from a rights issue to partly finance the purchase of the OUE Downtown office.

Since the beginning of this year, OUE Commercial REIT has produced a total return of 13.8%. Currently, it has a P/B ratio of 0.6 and a distribution yield of 5.8%.

REIT No. 2

The second REIT on the list is Sabana Shariah Compliant REIT (SGX: M1GU), Singapore’s first listed Shari’ah compliant REIT. It has 18 industrial properties in Singapore, and they span the high‐tech industrial, warehouse and logistics, and general industrial sectors.

For 2018, the REIT’s gross revenue decreased by 5% to S$81.0 million, NPI fell 1.1% to S$52.8 million, and DPU declined by 3.9% to 3.18 Singapore cents.

In the earnings release, Sabana REIT’s chairman, Yong Kok Hoon, summarised 2018’s performance and what investors can look forward to:

“In the past year, we delivered on our key strategic goals, even as headline performance was affected by the continued downcycle in our industry. Hard, long‐term decisions the team has taken in the last 12 months to reshape our portfolio will eventually result in an uplift in our performance.

Having laid a strong foundation, we are now focused on ensuring growth is on track. We will continue to focus on balancing current returns with future growth to optimise value for Unitholders.”

Since the start of the year, Sabana REIT has rewarded unitholders with a total return of 12.1%. The REIT now yields 6.1% and sports a P/B ratio of 0.7.

REIT No. 3

ESR-REIT (SGX: J91U) comes in the third spot. The REIT, which recently merged with Viva Industrial Trust, has a portfolio of 57 properties located in Singapore.

For the fiscal year ended 31 December 2018, ESR-REIT’s gross revenue and NPI ballooned by 43% and 42.8%, respectively. The improved performance was due to newly-acquired properties and the consolidation of nine properties from Viva Trust’s portfolio following the completion of the merger in October 2018. However, DPU for the year inched up just 0.1% to 3.857 Singapore cents due to a higher outstanding unit count following the merger.

ESR-REIT has produced a total return of 5.6% since the start of 2019. It has a P/B ratio of 0.8 and a distribution yield of 6.3% now.

The Foolish takeaway

All three REITs are trading at P/B ratios below 1 and sport distribution yields of more than 5%. However, a cheap valuation shouldn’t be the only criterion used to determine if the REIT is a buy. Investors should dive in further to look at the growth prospects of the REIT and whether the distribution yields can be sustained, among other factors.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Singapore Exchange Limited. Motley Fool Singapore contributor Sudhan P owns shares in Singapore Exchange Limited.