One lesson I learnt through years of investing is to never invest simply due to an investment’s high yield. It is more important to look under the hood to find whether the yield is sustainable over time.
With that said, here are two high-yield Singapore REITs that investors should stay away from.
Don’t be seduced by ESR-REIT (SGX: J91U)’s high annualised yield of 7.7%. The REIT’s DPU looks very likely to fall over the next few quarters. For one, its DPU in the first half of 2019 was artificially propped up by the distribution of capital gains made from a disposal and ex-gratia payments from the Singapore Land Authority (SLA) (due to the compulsory acquisition of land).
Both the capital gains and the payments from the SLA are non-recurring. As such, investors will likely see a fall in DPU when these capital distributions are terminated in the future. In total, the distribution from these two gains contributed 9% of the DPU over the first half of 2019.
The REIT also had a secondary offering to raise funds to fund an acquisition and asset enhancement initiatives. Part of the funds raised will also be used to pay off some of its debt, which will dilute DPU.
Because of these two factors, I am expecting an immediate fall in DPU in the coming quarters.
Soilbuild Business Space REIT (SGX: SV3U) currently has one of the highest annualised yields among REITs in Singapore. However, its DPU looks far from sustainable.
First, the REIT reported a negative rental reversion of 2% and 6.9% for renewals and new leases respectively in the quarter ended 30 June 2019.
In addition, NK Ingredients, one of its key tenants, which contributed 6.3% of monthly gross rent, defaulted on its rent in July. This will likely result in a loss of rent and the REIT will need to find another tenant to occupy the empty space.
To compound matters further, the REIT has a very high gearing of 39.4%, uncomfortably close to the gearing limit and has an interest cover of just 3.8 times. Because of its higher interest expense, any decrease in earnings will have a material impact on its bottom line.
As such, despite the current high yield, I believe the REIT still does not have an attractive risk-reward profile.
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