Real estate investment trusts (REITs) own income-producing real estate assets such as shopping centres, offices, and, business parks. They are a popular investment vehicle for income investors since they give out regular distributions, usually every quarter. Before buying a REIT, though, we have to ensure we are getting enough value for the money we pay.
To value a REIT, we can look at its price-to-book (PB) ratio and its distribution yield. The PB ratio is calculated by dividing the unit price of the REIT by its book value per unit (also known as net asset value per unit). In theory, a PB ratio that is below 1 means that the REIT is selling at less than what it is worth, and that makes the REIT undervalued. The distribution yield is similar to the dividend yield of a company.
With that, let’s focus on retail REITs with assets based in Singapore to find out if they are cheap.
Digging into the numbers
The following table shows the valuation of the three Singapore-focused retail REITs, namely, CapitaLand Mall Trust (SGX: C38U), Frasers Centrepoint Trust (SGX: J69U), and Mapletree Commercial Trust (SGX: N2IU):Source: Author’s compilation (data as of 8 May 2019)
Strictly speaking, Mapletree Commercial Trust is classified as a diversified REIT since it contains both a retail asset and commercial properties. However, since the REIT derives significant revenue from VivoCity, Singapore’s largest shopping mall, I’m adding it to the mix.
All the retail REITs trade at a PB ratio of above 1, with the cheapest of them being Frasers Centrepoint Trust at a PB ratio of 1.16. Frasers Centrepoint Trust also has the highest distribution yield among its peers at 5%. For the REIT’s latest second quarter ended 31 March 2019, distribution per unit (DPU) grew 1.2%, from 3.10 Singapore cents to 3.137 Singapore cents. The increase came on the back of higher net property income (NPI) for all its assets, except for Bedok Point, which registered flat NPI for the quarter.
Source: Frasers Centrepoint Trust 2Q 2019 earnings presentation
On a longer-term basis, Frasers Centrepoint Trust has achieved 12 straights years of DPU growth since its initial public offering (IPO) in 2006, showing the resilience of its underlying assets.
Wrapping up the REITs
From this simple valuation exercise, Frasers Centrepoint Trust appears to be the cheapest REIT among the trio. However, investors should also look into other aspects of the REITs such as their gearing ratio, future growth prospects, and so on, before deciding on which REIT is the best amongst them all.
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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 recommendations on CapitaLand Mall Trust, Frasers Centrepoint Trust, and Mapletree Commercial Trust. Motley Fool Singapore contributor Sudhan P owns units in CapitaLand Mall Trust.