The 4 most important things to consider when evaluating a REIT
Ok, so REITs are interesting. But how to choose? We know that we should diversify our porfolio across the 5 REITs types (see here). However, we need some metric to understand if a REIT is better than another one.
There are 4 main things to consider. There are others, of course, but these 4 will already allow you to filter out many REITs.
It is the ratio between debts (with banks usually) and assets. Why is it important? Because in case the interest rate goes up, a REIT with high gearing ratio may be unable to repay the interests on the debt. Eventually, the REIT may be forced to sell some properties.
I personally avoid investing in REITs with a gearing ratio above 36%.
Are you are investing in a REIT and your objective is to collect dividends? Then you do not want to choose a REIT that historically paid fewer dividends. Hence, you should look at the historical DPU (Distribution Per Unit) and only choose REITs with a stable or increasing DPU trend.
It is the ratio between the dividends paid in one year by the REIT and the price of the REIT. Even though the average yield may be different across the 5 REITs categories, in general, I avoid investing if it is below 5.5%.
The price/Net Asset Value (NAV) is a quick way to check if a REIT is overvalued/undervalued. This is more important for investors rather than traders.
As a general rule, if the price/NAV it is way above 1 the REIT is overvalued. Hence, if you are an investor you should wait for the price to drop before buying. On the other hand, if it is way below 1 it may be a good entry time. Notice that some categories (e.g., Healthcare) always have high price/NAV. In this case you can check the current price/NAV value versus the historical high and low to have a better idea of the value of the REIT.
There are other ways to assess the value of a REIT (e.g., discounted dividend method), but they are used less frequently.
Where can you find all this information? The good news is that there is a great (and free) website that allows you to screen for Singapore REITs in terms of type, gearing ratio, yield, and price/NAV. Moreover, you can also visually check the DPU trend.
You can find this website here