Real Estate Investment Trusts, or REITs, are investment vehicles that invest in real estate. Since debuting in Singapore some 17 years ago, REITs have rocketed in popularity due to their high yields, liquidity, and diversity.
In this article, I’ll highlight two REITs that have yields above 7% which I believe could make brilliant long-term investments.
Banking on Europe
Cromwell European Real Estate Invemnt Tr (SGX: CNNU) is a Europe-focused REIT that has 97 properties in its portfolio. Despite listing in late 2017, Cromwell European REIT has been one of the most aggressive REITs, making two major portfolio acquisitions in its short history as a public entity.
This has resulted in its gross revenue and net property income soaring in the first quarter of 2019. More importantly, the future looks bright for the REIT, which I expect would be able to grow its distribution per unit (DPU) in the coming years.
For one, some of its acquisitions were made only half-way through the first quarter of 2019. As such, when full-quarter contributions kick in next quarter, these acquisitions will likely be a boost to revenue and DPU. Next, the REIT signed new leases in the first quarter of 2019 that will only commence from April 2019 or later. The full effects of these new leases will only be felt later in the year.
Rental reversions for the quarter also came in at positive 4.0%. Rental reversion rates are the difference between new leases signed and expiring leases. A positive rental reversion should be a boost to DPU. Perhaps most appealingly, Cromwell European REIT, despite its propensity for growth, is trading at a relatively low price. At the time of writing, its units exchanged hands at €0.495, which translates to an annualised distribution yield of 8.2%. Considering that the REIT’s DPU will likely only grow from here, this current price looks to be a bargain.
Long leases and annual escalation
EC World Real Estate Investment Trust (SGX: BWCU) invests primarily in specialised and e-commerce logistics real estate in China. Despite slightly lower revenue due to the weakening of the Chinese Yuan, distribution to unitholders increased 2.2% last quarter on the back of lower withholding taxes. While investing in Chinese REITs at the moment may seem risky, there are reasons to believe that EC World is in a position to ride out the storm. For one, EC World has negotiated long lease contracts at most of its assets and has built-in annual rental escalations that should provide visible organic rental income growth.
Its port logistics assets are also inland ports that cater to tenants who handle domestic businesses with almost no exposure to international trade. Its tenants should, therefore, be less affected by the increase in tariffs imposed this month. On top of that, EC World has the financial muscle to grow its portfolio. Its debt-to-asset ratio, as of 31 March, was 31.3% – well below the 45% regulatory limit and this affords the REIT debt headroom to drive growth.
Like Cromwell European REIT, EC World trades at a low price, perhaps due to its exposure to currency risk and the geopolitical instability. However, its long lease contracts, resilient property portfolio, and built-in rental escalations make the risk-reward profile of the REIT attractive in my view. At the time of writing, EC World REIT trades at S$0.77 per unit. This gives it a price-to-book ratio of 0.88 and an annualised distribution yield of 7.8%.
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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.