In today's highly volatile market, it's good to invest in different markets for a more diversified portfolio! Although US market has been the #1 choice for most investors over the last few years due to its strong growth, it also comes with higher volatility and risk!
Let's do a quick performance comparison of different markets. STI Index (1 year): + 7.3%, S&P500 (1 year): - 11.1%, HSTech (1 year): - 39.7%. Surprisingly, the Singapore market is still up +7.3% (1-year) despite all the bearish sentiment and huge sell-down. Singapore is well-known for their SG-REITs. It has helped numerous Singaporeans built up their wealth through turbulent times through consistent payout and capital growth.
How do we evaluate and identify a good REIT?? With the rising interest rates and various global issues, here are some of the key factors that I would use to evaluate and identify a good REIT.
1. Debt amount, cost of debt and debt maturity. Most REITs took on debt for property acquisition and with rising interest rates, it is important to assess its current debt amount, its cost of debt and debt maturity to understand how it will affect the upcoming DPU. In fact, the cost of debt for most SG REITs have been increasing every quarter and high interest rate will definitely affect the upcoming DPU!!!
2. Healthy portfolio occupancy rate. It is almost impossible to have a REIT with 100% overall occupancy rate, hence I would to find a REIT with healthy occupancy rate that is at least 95% or above the market average (you have to compare with other REITs in similar areas - office, retail, industrial, healthcare, hospitality)
3. Positive Rental Reversion. This helps to grow the gross revenue over time to help fight inflation rates and potentially increase your DPU over time.
4. Growth prospects. A strong sponsor is the key for expansion and acquisition of attractive properties. The right-of-first-refusal (ROFR) of its properties enables the REITs to acquire the property before any third-party companies.
5. Growth in gross revenue and net property income (NPI). You would want to add a strong REIT that can consistently grow its revenue and NPI even during turbulent times.
6. Increasing Distribution Per Unit. This is what most investors are looking out for!! More sustainable and higher dividend payout over time!!
7. Gearing ratio below 40% (fixed and floating interest rates). With rising interest rate, this will be important as it indicates the strength of a REIT's balance sheet. It can be calculated by dividing the total loan by its total asset. A large amount of loan at a fixed interest rate is also desired. It is mandated by MAS that the gearing ratio needs to be lower than 45%, hence we want some margin of safety before it reaches the 45% gearing ratio threshold.
8. Interest Coverage Ratio (ICR). It is calculated by dividing its NPI by financing costs. A higher ICR indicates a stronger cash flow to service its debt.
9. Dividend yield above 5%. As most REITs have slower capital gain potential than other stocks, I would only like to accumulate them when the dividend yield is higher than 5% (higher than the inflation rates and risk-free investment such as SSB ~3% 10-years yield).
10. Acceptable price to book ratio. It is the difference between the REIT's assets & its liabilities (PB ratio = Unit Price/Book Value per share). I would like to buy a REITs that is close to 1 or lower than 1.
How do you choose a good REIT? Do let me know your tips and thoughts!!
$ASCENDAS REAL ESTATE INV TRUST(A17U.SI)$$FRASERS LOGISTICS & IND TRUST(BUOU.SI)$$STI ETF(ES3.SI)$$Nikko AM STI ETF(G3B.SI)$
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