Friday, November 27, 2015

Are REITs Attractive Now? Nov 2015

I just read the 25 Nov report by Credit Suisse. Good job Nicholas Teh and Daniel Lim, I like your research, steady la.



This is my favourite chart which is their opening chart. The data agrees very well with my logic:

Retail should yield the lowest since retail options are rather limited in their location choices.
Offices should be next up, since having an office is a rather essential business function.
Industrials are slightly riskier since there are alternatives, such as relocating across the border. Companies might also shutter their industrial operations and focus on asset-light services. They would still need an office, but perhaps not an industrial location.
Hospitality should be the riskiest since each "customer" stays for such a short duration and visibility is so low. They should have the highest vacancy rates among these 4 REIT sub-sectors.

Other than Suntec, Maple Logitistcs, Maple Industrial and Ascott, the rest all look pretty tasty in terms of their current yield comparing to their historical yields.


The yield of CMT, MCT, FCT and SPH are all looking really pretty to me in my opinion.


As a lot of people know, I'm a nut when it comes to REIT NAV (or PB). I really like this chart because my generic table of sub-sector premiums can't take into account other subtle, yet important factors, such as historical performance, brand value, investors' preference etc.

Looking at book value, we can see that most of these REITs are trading at "attractive" book values. Based on this graph, Ascott doesn't look that bad yet, while CDL HReit, FCT and Ascendas are looking good. I use "attractive" instead of attractive because I know that this is very subjective and not a lot of people agree with me that book value is as important as my personal emphasis on it. That's all right, I'm not out to convince people to follow me or my thinking.

Personally, I think CDL and SPH would be my top picks, followed by CapitaMall and Mapletree Commerial and then Keppel and CapitaComm.

I've talked about it before and I truly believe that interest rates have absolutely nothing to do with the long-term returns of REITs as an asset class:

One thing I like to personally add is regarding the "white elephant in the room" that was mentioned like every 15 minutes. Interest rates have very little effect on REITs in the long term. Interest rates affect bonds, and not REITs. Any short term weakness caused by rising rates is an opportunity to load up on them suckers. The correlation of REITs to bonds is almost perfectly zero. Interest rates do not affect each asset class in the same ways. - GMGH, 24 May 2015

In the long-run, I think that the valuations that we are seeing in REITs now are rather attractive. However in the short-run, there's nothing stopping REITs from going even lower, which I suspect is the fear that most investors have, especially with "interest rate hikes just around the corner".

If everybody is right all the time about everything, we would all just be millionaires, right?

No comments:

Post a Comment

Observe the house rules.