Are SGX-listed REITs in a Bubble?

Bank deposits are giving a paltry 0.05% to 0.1%, hardly enough to beat the raging inflation currently in Singapore. Property prices are still sky-high. Singaporeans have lots of cash and they do not know where to deploy them to make their cash work harder. This is evident from the recent gold scams many fell prey to. Amid this low interest rate environment, real estate investment trusts (REITs) have been the talk of the town as investors chase for high-yielding instruments that give a bang for their buck. However, are investors looking to invest in REITs a little too late for the party? Before we answer that, let us examine a few hard truths.

Firstly, let’s take a look at the price/net-asset-value (price/NAV) and distribution yield of some REITs.

comparison

(Source: ShareInvestor)

It can be seen from the table that almost all REITs are trading above or very close to price/NAV. Only three REITs are trading at price/NAV below 0.9. Interestingly, Parkway Life REIT is trading 58% above price/NAV!

The dividend yield of around 4-5% for those REITs still trading below NAV is hardly attractive (provided those REITs are strong fundamentally in the first place!). Blue-chip companies like SIA Engineering, Singpost and Starhub are currently yielding 4.3%, 5% and 4.6% respectively. Kingsmen Creatives, one of my favourite companies, is yielding 4.6%. Some of the companies mentioned like SIA Engineering and Kingsmen give such yields by taking on much lower debt, compared to most REITs do. REITs work by taking on debt and rolling them into the future. A recent article shows that REITs may not be able to cope when interest rates rise.

Secondly, below is a three-year comparison and a one-year comparison of the Straits Times Index (STI) and the FTSE Strait Times Real Estate Investment Trust Index (FSTREI):

3 years

1 year(Source: Bloomberg)

It can be seen from the charts that up until around mid-April 2012, the FSTREI and STI have been moving almost in tandem. After mid-April 2012, the FSTREI has been going much higher than the STI at a burgeoning rate!

Thirdly, in early January this year, Business Times reported that “S’pore Reits gave highest yields at lowest volatility in 2012“. Many were talking about this article in the streets and during seminars I went to. People who do not invest wanted to buy REITs for their high yields, without understanding the risks behind it. It was like in 2000 during the technology bubble where everyone wanted to buy stocks that had a “.com” in their name.

Last month, Singapore Exchange (SGX) reported that “Singapore’s REIT index has outperformed Japan and Australia across 5 years“. This can further increase interest in REITs and cause the premium above NAV to rise further. I would not be surprised if most REITs, including those not fundamentally strong, are traded at 50% above NAV in time to come!

Lastly, many REITs recently went IPO, including the most recent Mapletree Greater China Commercial Trust IPO. Singapore Press Holdings (SPH) and Overseas Union Enterprise (OUE) are also contemplating spinning their assets into a REIT. Such IPO frenzy would not take place if the REIT market was depressed, like during the financial crisis of 2008/2009.

In any bubble, new “investors” push up the price of the asset due to the influence of other “investors” who are already making money from it. This herd behaviour of buying REITs for their distribution yield may come to an end one day and it can be scary! Warren Buffett’s quote come to my mind: “Only when the tide goes out you discover who has been swimming naked.”

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