Big valuation difference in Industrial Reits

[Nick]

A-REIT tenders for Business Park Site at Fusionopolis for S$110 million

http://info.sgx.com/webcoranncatth.nsf/V...6003CCBE9/$file/Press_Release_fusionopolis.pdf?openelement

A-REIT has the size and expertise to take on development projects unlike most of the small cap industrial reits. I guess this is why it can trade at a lower yield ?

[tanjm]

A development project is more risky than renting out an already developed project. It is not necessarily a plus point. If I want to invest in a property developer, I'd do so in a real property developer.

[tonylim]

A development project is more risky than renting out an already developed project. It is not necessarily a plus point. If I want to invest in a property developer, I'd do so in a real property developer.

Fully agree with you. Buying reits is for DPU , buy existing properties with immediate recurrent rental income.

[Voltage]

How about Sabana? Guess it's still pretty new so there isn't much history behind it, but I feel that one of it's selling points as the world's largest listed sharia'ah compliant REIT does sound promising to me. With oil at high prices and unrest in the middle east, wouldn't there be lots of petrodollars looking for opportunities beyond the middle east to be invested in?

[tonylim]

When its profile is high and big funds take notice of it then the yield will be compressed.

[redcorolla95]

A-REIT tenders for Business Park Site at Fusionopolis for S$110 million

http://info.sgx.com/webcoranncatth.nsf/V...6003CCBE9/$file/Press_Release_fusionopolis.pdf?openelement

A-REIT has the size and expertise to take on development projects unlike most of the small cap industrial reits. I guess this is why it can trade at a lower yield ?

There're a few reasons why the A-Reit can trade at a lower yield
- Lower cost of borrowing - size & parent backing
- Growth potential - financial strength & parent backing
- Better performance over a longer period of time

[tanjm]

Here's another way to look at it.

REIT yield spreads against 10 year government bonds is a common measure. In the US, REIT spreads is usually around 100 to 200bp above 10 yr treasuries.

Singapore government 10yr maturity now yields around 2.5%. By this criterion even Ascendas reit is somewhat undervalued (even if you take into account leashold industrial property), and certainly higher yielding reits like CIT and Sabana look to have very high yields. Part of this is possibly the Singaporean preference for growth against income. Another part is possibly that we are not yet over our mental scaring over the financial crisis yet. Yet a third one might be that the market is expecting interest rates to rise soon.

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So if you are afraid of the credit risk of the small guys, then one possibility is to simply diversify by constructing your own "indexed fund" and buy a little of every high yield REIT without much bother about analysis.

[Voltage]

If you're using REIT yield spreads to judge valuation, it might be more indicative to look at Singapore REITs' historical average yield spread. Singapore govt 10yr bonds have generally been below 4% for much of this decade, but I think REIT yields here have generally been above 6% (actually that's just my feel, I don't know where to conveniently get data on REITs' historical yields). Anyway, what I am trying to say is that maybe the 'normal' spread in Singapore is simply higher than in the US, due to whatever reasons.

However, that is an interesting way to look at REIT valuation. Maybe I'll take a look to see what the average historical yield spread here is if I can find the data.

[Voltage]

The following DBSV report has some pretty nifty graphs on the yield spread back to 2003.

http://www.remisiers.org/cms_images/rese...update.pdf

Anyway, what it shows is that tanjm was right in that overall SREIT spreads were generally around 100 to 200 bp above 10yr treasuries from 2004 to end 2007, and currently the spread is around 350 bp for the SREIT index.

Looking at the individual REIT spreads towards the back of the report shows that the industrial REITs that have some history like Ascendas and Cambridge generally had spreads above 2% however, so their current spreads are not all that far off from their historical levels.

MLT is pretty far above its historical spreads, but that's because its historical spreads were much lower than Ascendas' and Cambridge's. I've no idea why MLT had spreads that were so much lower than Ascendas previously though, since I thought they are both considered big and safe.