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REIThinking Your Investment Strategy

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After steadily raising interest rates for the past 2 years, the Fed is indicating that it could take a pause from more interest rate hikes. The officials are signalling that they will wait and monitor the market before deciding whether the economy is strong enough for another rate hike.

With interest rate risk deflating and the flight to safety trend, most S-REITs are showing significant positive return over end-2018 share price. KGI notes that this will continue to be the dominant trend moving forward. As such, despite recent capital gains, KGI believes that the current valuation of S-REITs is still moderately attractive for investors to enter into S-REIT investments.

KGI: Ranking S-REITs On 4 Investment Criteria

To help investors decipher which S-REITs to invest in, KGI categorised the S-REITs into four investment criteria. KGI then explored and analysed the S-REIT sector to come up with a ranking of 40 S-REITs:

  1. Largest Market Capitalization


Source: KGI

  1. Lowest PB Ratio Compared To 5 Year Historical


Source: KGI

  1. Highest Dividend Yield


Source: KGI

  1. Highest Annualized Total Returns Since Listing


Source: KGI

Investors Takeaway: 2 Recommended Investment Theme For S-REITs By KGI

While the ranking gives an indication of how each REIT fares in the corresponding criterion, KGI notes that not every S-REIT is worth investing in. Among the S-REITs, KGI highly recommends following two investment themes: Quality S-REITs with strong sponsors and low PB S-REITs (vs 5-year historical).

Investment Theme 1: Quality S-REITs With Strong Sponsors

Based on historical data, quality S-REITs typically come with higher annualized total return  (dividend + capital gains). This compensates for the higher price point of quality S-REITs which tend larger in market capitalization for those backed by strong sponsors. Although this group of S-REITs offer lower dividend, KGI prefers them for their consistent dividend payments.

Among the large cap S-REITs, KGI’s preferred picks are: CapitaMall Trust, CapitaCom Trust, Mapletree Commercial Trust, Mapletree Logistics Trust, Mapletree Industrial Trust, Frasers Centrepoint Trust and Keppel DC REIT.

Investment Theme 2: Low P/B Ratio Compared To 5 Year Historical

According to KGI, the cheapest S-REITs by price-to-book valuations (P/B) are likely to be associated with higher dividend yields, albeit coming with a bit of risk. For example, Lippo Mall Indonesia Retail Trust has underperformed their peers due to broader market risks in the Indonesian respectively. The high dividend yield was a result of the underperformance in the share price.

When going for low P/B REITs, KGI cautions investors to weigh whether the 100-300bps in yield spread are attractive over high quality counters which have lower risk of capital losses. Last year, low PB REITs lost an average of 13.5 percent for the underperforming S-REITs.

Among the low P/B S-REITs, KGI’s preferred picks are: Ascendas Hospitality Trust, Manulife US REIT, Far East Hospitality Trust, Frasers Centrepoint Trust.

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