Revisiting REITs

What you do consider when buying REITs?

1) Dividend yield = absolute dividend / stock price

2) Price-to-book ratio, P/B = stock price / net asset value

3) Gearing = debt / equity

If we look at the Singapore REITs (SREITs), the above 3 key factors did not change much over the past few weeks but the prices of most SREITs have plunged almost 20-30% during the period. Why?

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Source: MAS
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Source: Bloomberg, FTSE REIT Index (YTD)

 

I think one important factor to look at is the differential between the SREIT dividend yield and the 10-year Singapore government bond yield, i.e. yield spread.

The current 10-year SG government bond yield is 2.73% (26/6); if a blue chip SREIT’s forward dividend yield is 5.3%, will the yield spread of 2.57% be enticing enough for you to buy the SREIT? You can try this exercise for each REIT and compare its yield spread historically and during severe market conditions such as during the GFC before making an investment decision.

A yield spread that is too tight may signal government bond price to rise (thereby lower bond yield) or REIT price to fall (to bring about a higher dividend yield), all else being constant. It may also be the case that the tight spread becomes the new normal for investors going forward.

For an investor with a specific investment time horizon, using REITs as a fixed income substitute may not be suitable as the principal may be at risk at time of liquidation. As observed in recent markets, there may not be any major changes in the fundamentals of the SREITs, yet the price of the SREITs fluctuated wildly due to exogenous factors such as movement in interest rates.

For liquidity and time horizon sensitive investor, putting your money in a P2P loan with a fixed tenor might be an alternative. In a rising rate environment, the relative returns will be impacted; but as long as there is no default, the investor will get back his principal at maturity.