Real Estate Investment Trusts, or REITs, are one of the more popular investment vehicles in Singapore. Besides providing investors with exposure to a range of real estate types, REITs also offer attractive and recurring dividends (technically a REIT dividend is known as a distribution but let’s not split hairs here).
That being said, not all REITs will perform equally over the long term. Investors need to be able to sieve the wheat from the chaff. With that said, here are two REITs that I feel are way too expensive and would offer comparatively weaker returns at current prices.
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Dasin Retail Trust (SGX: CEDU) is the first REIT I am avoiding now. The China retail REIT currently pays out artificially higher dividends to unitholders due to two major unitholders waiving a portion of their entitlement for the benefit of minority unitholders. However, the waiver will expire in 2022 and distribution per unit (DPU) will drop substantially.
To put this in perspective, the DPU in the first quarter of 2019 was 1.7 Singapore cents. However, if you remove the effect of the distribution waiver, the DPU would have dropped to 0.95 Singapore cents.
At its current price of S$0.88 per unit, the distribution yield without the effects of the waiver is only a meagre 4.3%. This compares unfavorably with other China-focused REITs in the market, many of which sport yields of 7% and more. On top of that, the number of units of the two major shareholders that are not entitled to distributions is also declining each year, as shown in the chart below.
Source: Dasin Retail Trust Q1 2019 earnings presentation
As you can see, the number of units not entitled to the distribution falls dramatically in 2021, which will very likely lead to a steep fall in DPU that year. With other China REITs offering a more sustainable yield, I will be staying away from Dasin Retail Trust for now.
The second REIT I am avoiding is Parkway Life REIT (SGX: C2PU). This may come as a surprise to some as Parkway Life REIT has been one of the top performing REITs in the market. In fact, Parkway Life REIT has a remarkable track record of growing its DPU, which has more than doubled since it listed back in 2007.
It also leases its healthcare properties to reliable tenants and its leases include an annual rent review of at least 1% or even more depending on the consumer price index. However, the REIT at current prices is far too expensive for my liking.
At the time of writing, its units trade at S$3.03, which translates to a meagre 4.3% yield and a staggering 61% premium to its book value. On top of that, the REIT’s capacity for growth is nowhere near what it used to be. At the end of 2007, Parkway Life REIT had a gearing of (would you believe it) just 3.96%. Today, Parkway Life REIT’s gearing now stands at 36.4%.
The REIT has done very well to optimise its capital structure but now has limited flexibility to take on more debt. It, therefore, does not possess the same growth potential as it used to.
Taking everything into account, I think that Parkway Life REIT, despite its enviable track record, has too much optimism baked into it at the moment. I think investors would be better off putting their money into other REITs that offer higher yields and better growth prospects.
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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 the shares of Parkway Life REIT. Motley Fool Singapore contributor does not own shares in any REITs mentioned.