Tuesday, October 7, 2014

My Analysis of J-REITs vs. Saizen REIT

Hi all, I'm back from my holiday. It was a good vacation for me. I got to meet an old friend, made many new friends, discovered a new place and had a really good time with almost no distraction from work or the market since I barely had internet. It was good being disconnected for a while.

Anyway, I've been wanting to do an analysis of Saizen REIT compared to other J-REITs. It's just a simple one, nothing too complex. It's definitely an on the surface analysis, but I think it does reveal some interesting stuff about it.

I extracted the information regarding J-REITs from Reuters on 29 Sep 2014 before I left for my holiday. I am too lazy to update it to today's prices and figures, but let's just live with it, okay? I took simple metrics of Market Cap, Yield, P/NAV and D/E ratio. I took the list of REITs from the SMTRI J-REIT Index and looked up the constituents that were grouped under Residential.

Extracting all the data and listing it in a table, et viola!

I have sorted the table based on market cap because if you look at it closely, market cap seems to be the main determinant of the yield of the J-REIT. The bigger market cap the J-REIT has, the more people are willing to own it, pushing the price up and dropping the yield. It makes sense for sure. Definitely should own the big cap blue chip stable players, right?

However, the variance of the yield between the largest and the smallest J-REIT is only about 100bps or just 1%! The smallest J-REIT of Starts Proceed Investment Corp is very similar sized to Saizen REIT, however that is just about where the similarities end.

The average J-REIT yields 4.1%. The range is very tight, between 3.65%-4.65%. Saizen REIT yields almost double of that at 7.1%.

The average J-REIT P/NAV is 1.42. Excluding the 1 outlier of Comforia, we get an average value of 1.31. The P/NAV ranges from 1-1.6. Saizen REIT is trading at 0.77, a massive 20+% discount to book value.

The average J-REIT has a D/E ratio of 108%. This means that they are more debt than equity... which I personally find scary. The D/E ratio ranges from 95%-125%. Saizen REIT is much more healthy at just 60%.

Why such the mispricing of Saizen REIT?

Personally, I think that Singaporean investors, especially those in the REIT arena are very yield-conscious. If they yield is too low, they will not consider it. Many also shun overseas investments because they just feel "less tangible". These are valid reasons no doubt, but I think that a good analysis should be approached from many different angles, and if many agree, it is probably a good conclusion.

Looking at this very specific investment in a niche asset class, I would say that Saizen REIT suffers from only one thing, which is being listed on SGX. If Saizen REIT was listen in Japan, I am certain that it's yield would be bid down to at the very least, a 5% handle, if not, in the high 4+% range. Even if P/NAV is priced at the lowest end of the range, of just 1.0, there is plenty of upside from this current position. On top of the cheaper valuations based on yield and P/NAV, Saizen REIT also has a better balance sheet with much less debt relative to equity. It is a good thing to be better capitalized.

My personal conclusion? Saizen REIT is a gem in the S-REIT environment. While looking at it purely based on yield compared to other REITs available on the SGX, it may seem more risky and unattractive, but comparing it within it's own niche segment of J-REITs, Saizen REIT is actually extremely attractively priced. Singapore REIT investors may not know how lucky they are, but the REITs listed on the SGX are by far one of the highest in the world when it comes to REIT yields spreads. Why? My reason totally unbacked by any research or studies is because Singaporeans are very silly and LOVE to invest in a million dollar condos and yield 2% net after expenses. Why do they do that? I don't know and I don't really care, as long as I still have fat yields, mmm nom nomz. Sure, there are reasons to prefer an investment property instead of something like REITs. They aren't very good reasons at all, but reasons nonetheless. Perhaps my next article I will write will be "why buying second investment properties may not be the wisest thing to do for the typical investor". But then again, I don't want everyone rushing into REITs instead. Maybe after I increase my portfolio in REITs, haha. Anyway, I digress.

Will Saizen REIT's price ever permanently increase and not trade at a discount? I suppose that depends on how willing Singaporean investors are to accept the yields of it. I am vested in Saizen with just 1 lot, but this is one REIT that I am keeping a close eye on, because I would like to increase my position with them. Sure 1 lot is just small money, but it's still my money and I am looking after it.

Yes I know, this is all not very scientific methodology at all. But, hey, at least it is a good reference point. What do you think about Saizen REIT? And the S-REIT environment now?


  1. Would love to hear you updated feelings about the J-REITS/SAIZEN. Seems like Saizen would be more susceptible to market movements, no?

    How about other REITs? For example, industrial etc..

    1. Hey Shimamoto,

      I just made a new post about this after looking at what has happened in the past few months.

      Locally on SGX, certain REIT sectors look weak to me. I think the strength and resilience of the industrial sector is being over-estimated. Hospitality is also looking very weak and it is showing already. Generally things just feel a lot more optimistic than what reality seems to be, from my perspective.

      What do you think?


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