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Is there still trust in Reits?

Real estate investment trusts do look attractive in the long term at current prices, but investors must choose carefully and diversify their investments accordingly.

With lower prices, S-Reits (Singapore listed Reits) now offer dividend yields of around 12.4%, compared with around 7.3% a year ago and 4% in june 2007. Sibor rates have also fallen, from 2.7% in June, to the current 0.7%. Dividends yield premium has thus improved to 11.9%, from just 1.4% two years go. Prices of Reits are also at more affordable levels now. For etc, the prices of CMT (CapitalMall Trust), A-Reits and Mapletree were at $1.40,$1.59 and $0.56 respectively as at june 30 2009, around half the prices in june 2007. Do also note that, even though the prices of Reits have almost halved, it doesn't mean its a value buy because systemic perceived risk have more or less doubled in 2009 as compared to 2007. -Akat

Most importantly, the good and bad Reits are now easier to differentiate. How is this so? The lower "tide" (which means the current economical problems of the world) has exposed Reits that have bad assets and have been poorly managed making investment decisions easier then two years go.

Reits do look attractive in the long term at current prices, but investors must choose carefully and diversify their investments accordingly. Here are a few important factors to consider:

1)A Reit's (Not A-Reits) ability to raise funds, especially in times of turmoil, will determine its ability to thrive and survive. This is an important factor. In good times, most Reits will enhance their yields through higher leverage , but only well managed ones will be able to reduce this leverage, in challenging time or risk being challenged themselves. Without this ability, badly managed Reits will find it difficult to refinance or raise sufficient equity to repay their loans, putting them in danger of liquidation.

2)The quality of assets is another important factor, and Reits that own properties beyond just Singapore would be a plus. Too much emphasis has been put on dividends and too little on assets. Investors must bear in mind that they are buying the underlying assests hen investing in Reits-the dividends are the result of the ownership and management of the assets.

However, good assets can produce poor returns if poorly managed.

3)The quality of the managers or management is therefore another vital factor. Good managers will continuously enhance the yield of the assets and use an appropriate debt-equity mix at all times.

A sudden fall in rental revenue (poor assests? or business model), rental collection issus (High recievables) and below average rental yields (Industry not resilient) are some signs of poor management. Such Reits should be avoided.

4)Last but not least, investors must check if a counter is a Reits or a business Trust, such as CapitalMall Trust vs India Bulls Property Investment trust. The difference between the two is that the former is required to pay 90% of distributable income to unit holders, the latter has no such requirement, thus investors should therefore look closely at what they are picking to ensure the counter they choose is in line with their investment intention.

Article written by Roger Tan as at 11th July 2009