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3 Things to Look Out for in REITs

Since debuting in Singapore in 2002, Real Estate Investment Trusts, or REITs, have skyrocketed in popularity. Besides providing investors with exposure to a wide variety of real estate previously inaccessible to retail investors, REITs are also known for their high distribution yields and propensity for appreciation.

However, like stocks, assessing which REIT to choose for your portfolio requires a look at key financial metrics and operating performances. With that said, here are three key things that could separate the winners from the losers.

Upward rental reversion rates

The rental reversion is the difference in rental amount between new contracts signed and expiring contracts. This is an important metric that investors use to determine if the REIT has pricing power with its tenants and can provide higher organic rental income growth.

A positive rental reversion rate signals strong pricing power and points to higher rental income in the upcoming quarters. A negative rental reversion rate, on the other hand, is a signal that investors could see a fall in distribution per unit (DPU) in the next few quarters.

Property valuation

An upward valuation of the properties of a REIT does not have an immediate impact on rental income and DPU, but it could have an important long-term impact on the overall returns of the REIT.

An upward revaluation of a REIT’s properties will increase its asset base and provide the REIT with the additional financial muscle to make debt-funded acquisitions.

In addition, REIT managers can reward unitholders by selling properties that have increased in value and paying out a part of that money in distributions — or use the proceeds from the sale to purchase higher-yielding assets.

Tenant retention rate

A third factor to look out for is a high tenant retention rate. Customer retention is cheaper and much more beneficial over the long haul than customer acquisition. In addition to customer acquisition costs, REITs may also face repair costs whenever there are tenant turnovers.

Therefore, a REIT that is able to maintain a lasting relationship with existing tenants tends to have a more stable and reliable income over a long time frame.

Most REIT will provide tenant retention rates in their quarterly earnings presentations. As retention rates can vary according to sectors, investors should compare a REIT’s tenant retention rates to those of its peers.

The Foolish bottom line

REIT investors typically look at a REIT’s financial track record and capital budgeting. The factors listed above are, therefore, sometimes overlooked. However, rental reversion rates, property valuation, and tenant retention rate are important factors that could determine the long-term performance of a REIT.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.