REITs: When to buy?

This is taken from the weekend edition of The Business Times:

Simon Rudolph, Franklin Templeton Investments' portfolio manager for global equities: "We invest in REITs when we can buy them with good yields, but most importantly, at a good discount to the NAV. Real estate has to be about total return and not just income."

"When you buy something at 30% premium to NAV, unless there is a reason it is trading at a premium, it can still go back to par."

This is something that I can identify with and it is something I have always talked about in my blog as something to look out for when deciding which S-REITs to invest in.

Off the top of my head, my investments in AIMS AMP Capital Industrial REIT and First REIT appreciated some 40 to 75% in value in the last 3 years. This is on top of annual distribution yields of 13 to 17%. Readers who have walked the walk with me the whole time could possibly verify this.

So, if we believe Simon Rudolph, does it mean that now is not the time to buy into S-REITs? Well, not the best time perhaps but, for some investors, being able to secure an annual yield of >7% is considered very attractive in the current low interest rate environment. Even a 6% yield could be considered attractive.

We could possibly see yield compression to continue in S-REITs as money continues to search for places where it is treated better. Another 10% appreciation in the unit prices of S-REITs cannot be ruled out in 2013.

A few days ago, a reader made a comment regarding Saizen REIT which is still trading at a significant discount to its NAV. This is a REIT that was unloved and ignored for a long time. It was still the case when I decided that it was terribly undervalued and bought into it. What about now?

Well, being a REIT with properties in Japan and its income in JPY, the bug bear is forex risk. The JPY has been on a decline. It has weakened against the S$ by about 10% in the last 12 months. So, this will affect its NAV and distributable income in S$ terms.

Even so, we could be looking at a NAV of 27c/unit and a DPU of 1.134c a year. A unit price of 17c means a 37% discount to NAV and a distribution yield of some 6.67%.

If we were to factor in a worst case scenario of a further 10+% decline in JPY against the S$, we could expect a NAV of 24c/unit and a DPU of 1.01c a year or a 29% discount to NAV and a distribution yield of 5.94%.

It is perhaps worth remembering that Saizen REIT owns freehold properties and that its bank loans are amortising in nature. The relatively lower distribution yield could be acceptable, therefore.

REITs, when to buy? Obviously, there were better times and there could be better times again but is leaving most or all our money in savings accounts which pay almost nothing in interest a better choice when inflation of 4% per annum is set to be the norm? You decide.

Related posts:
1. Saizen REIT: 2H FY2012.
2. REITs: Simply explained?
3. Inflation is not going away.