New cooling measures and the effect of the hungry ghost month sent new private home sales down 64% in August. Well, if you love property investment, there is actually another alternative investment asset class Real Estate Investment Trust and you even get to choose the property type other than residential, and this includes hotels, shopping malls, offices, hospitals, warehouses and even data centres.
I like to upgrade my knowledge and attended a morning seminar on REITs investment by author of REITS to Riches Tam Ging Wien.
Of course a morning seminar like this is not enough time to go deep into the whole REITs analysis framework. For REITs investment, you can still generally follow the stock investment framework though there are special characteristics of REITs which require you to focus on specific areas.
I paid $15 as I am a Shareinvestor member, I really think this seminar is so worth it and undervalued as a great introduction to REITs investment, especially for beginners.
I won’t go into the details but on evaluation of REITs, in my article Real Estate Investment Trust I proposed the MONEY method which I reproduce here:
- M – Management (evaluate the track record of the REIT Manager)
- O – Owing (the gearing ratio or (total debt)/(total assets) should be preferably < 0.4)
- N – NAV Net Asset Value (the Price/NAV or P/B ratio should be preferably < 0.8)
- E – Estates (qualitatively analyze the locations, positionings and tenancy of assets and properties)
- Y – Yield (> inflation rate, 5% to 7% acceptable)
I listened to author Wien and I think on N and Y, a better approach may be:
Net Asset Value (P/B Ratio)
Track the average historical P/B ratio and consider a purchase decision when current P/B ratio is lower than this historical average. Example, let’s take a look at CapitaMall Trust:
I calculate the historical average P/B to be (1.0524+1.0860+1.1242+1.1241+1.1976)/5= 1.12. Current ratio is 1.05. Looks good?
Yield (Distribution Yield)
I will still assess if yield is good enough to me as compared to risk-free yield. To me more than 5% is still acceptable at this point. Another thing to also take into consideration is whether the REIT’s DPU (distribution per unit) is growing over time. Again let’s take a look at the case for CapitaMall Trust.
The DPU is stable and growing slightly.
Purely looking at absolute yield may sometimes be dangerous but if the DPU is rising or at least stable, it passes the first round of filter.
Tam Ging Wien has a 1.5-day course which will go into the details, you can register at Evenbrite and I believe there is a discount of $50 with promo code of special50. If I am a stock investment generalist, Wien is a REITs specialist, not just in Singapore but globally, so check it out.
Disclaimer: the discussion in this article is for financial education and illustration purposes and it does not constitute any recommendation for any investment decision. Readers should exercise their own judgment and take into consideration risk factors when investing.