Are Singapore REITs Overvalued?

There are more chatters over Singapore’s REITs environment.

Article by Bloomberg

Recently, there was a post (“Singapore REITs Are Seen as Too Expensive After an 18% Surge This Year“) by Bloomberg.

Here’s an extract:

Foong has sell ratings on CapitaLand Commercial Trust, CapitaLand Mall Trust and Ascendas Real Estate Investment Trust, and a hold on Suntec Real Estate Investment Trust.

“For the four REITs that we cover, the dividend yield is below their 10-year historical average,” Foong said.

The REIT index’s estimated 12-month forward dividend yield stood at 5.13% at the end of last week, down from 6.22% at the start of the year.

“The rally of Singapore REITs seems to have been overstretched for now, and profit-taking activities are kicking in,” Margaret Yang, a strategist at CMC Markets Singapore, wrote in an email. “Rich valuation and relatively less attractive yield compared to the banking sector have rendered REITs susceptible to some short-term sell-off.”

A REIT is vastly different from a company.

A REIT tends to grow by raising rental and acquiring properties. A company grows by raising prices, entering into new markets and creating new products.

In short, investing in companies is more suitable for capital appreciation while investing in REITs is for regular passive income.

There will be a time where REITs are overvalued but how do we know that?

Benchmark for REITs

My benchmark for a good REIT in Singapore is 5.5 – 6% yield with stable DPU.

(Click here for the enlarged image)

You will soon realise the yield of quality REITs (such as Frasers Centrepoint, CapitaMall Trust and Parkway Life) are depressing downwards. Is this the new norm?

Well, I think as outstanding investors, we have to be unreasonable in our approach.

1. Choose the best REITs
2. Don’t settle for less
3. Buy REITs with good yield

If yields are low, do we have to buy? NO! We have choices to make as investors.

Example

Taking the example of Parkway Life REIT, it gives 4.3% at $3.01.

If my benchmark is 5% yield, what price should I buy Parkway Life REIT?

( 4.3% / 5%) * $3.01 = $2.589. It means that I have to wait for the share price to drop 14% before the yield goes back to 5%.

(RELATED: Should You Invest in Frasers CentrePoint Trust (SGX:J69U)?) 

An increase of 0.7% in yield would cause the share price to drop by 14%!

What happens if you sell your REIT now? You’ll collect 14% “upfront” while waiting for the yield to revert back from 4.3% to 5%.

Taking 14% / 4.3%, that’s 3.26 years worth of dividends upfront!

Conclusion

Now you know a small increase/decrease in a REIT yield would cause a disproportionate increase/decrease in a REIT’s share price.

When you buy a REIT, you are locking in the yield.

For example, if a REIT yields you 4% at the time of purchase, you’ll get 4% irregardless of the share price moves in the future unless the REITs grow its distribution per unit.

Do you want to lock a yield of 4 to 4.5% or do you prefer 5.5% to 6%?

They say, you can never lose by realising your winners. Look at your current REITs and find out whether it makes sense for you to divest then buy back later.

Again, everything is on the basis of your own benchmark. Hopefully, what I shared may allow you to think whether some REITs are overvalued.