Singapore Reits have really taken it on the chin in the past 2 years.
Now, I don't have a crystal ball where Reit share prices are headed.
Reits are trading below mean valuations
But I do know in 2 or 3 years, I would regret it if I didn't scoop up Reits trading at 0.86x price to Net Asset Value, which is 2 standard deviations below their mean.
Singapore Reits usually trade at a mean valuation of 1.03x P/NAV.
Could valuations drop even further to 3 standard deviations below mean? Sure.
But could they recover in 2-3 years, when interest rates have normalised? Of course.
I just have to make sure I select Reits that will last the distance. Blue chip Reits that would still be around in 2-3 years time, even with a hard landing.
In the event there is another rise in Treasury yields, I'm saving some bullets for more Reit purchases, should they get even cheaper.
Reit yield spreads are not that exciting
Compared to historical spreads of around 300 bps, Singapore Reit spreads are not that exciting.
At 6.4% yield, they are only 0.5 std dev. above their mean yield of 6.1%.
However, I acknowledge that it will be difficult for Reits to grow their Distributions per Unit, or DPU, given higher borrowing costs.
In fact, we may see DPUs drop by 2-5% in 2024.
Which Reits are worth looking at?
Gearing ratios are high in the local commercial and US commercial real estate Reits.
Capitalisation rates for the office sector are also below funding costs of 4-5%.
Analysts from DBS Vickers are recommending blue chip retail and industrial Reits with strong sponsors.
Coming risks for Reits
Risks to Reits’ share prices include an annual valuation exercise at the end of 2023 that could see negative revisions to asset valuation.
Other risks could including further rises in US interest rates (both short and long end), higher than expected inflation, and higher than expected growth.
There may also be further equity fundraising ahead.
This is just my humble opinion. I don't expect anyone else to share it. While I'm adding to Reits, my portfolio goals may be different from others. Thanks for reading!
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