In a world with compressed property yields, many have been seeking for higher returns in sub property segments such as Industrial properties. Others have invested in other type of property reits such as those specializing in Office property like Capitaland Commercial Trust and need to diversify their holdings.  Beginners interested in learning how to invest money in Singapore can look at Ascendas Real Estate Investment Trust (A-REIT).

Please see below for the historic share price of AREIT

If we want to do a cross market comparison of A-REIT with its peers, there are a few metrics that will be of interest; namely; Dividend Yield and the Discount or Premium to Net asset Value (NAV)

A-REIT’s Dividend yield comes up to around 2.44%. This means that if an investor buys A-REIT units at the current price of SGD 3.01 (30th November 2020), he is likely to get a dividend return of 2.44%, assuming that AREIT does not change its dividend pay out for the coming year. 

A dividend yield of 2.44% sounds good relative to the Singapore Savings Bond which is currently yielding slightly under 1% yield (0.87%). However, it pales in comparison to the Mapletree Reits as well as Capitaland Integrated Commercial Trust, which is he merged entity of Capitaland Commercial Trust and Capitaland Mall Trust. 

REIT	Dividend Yield (%)
Ascendas Reit	2.44
Mapletree Logistic Trust	4.18
Mapletree Industrial Trust	4.09
Capitaland Integrated Comemrcial Trust	4.73

One of the main reasons why Ascendas Reit has such a low dividend yield has to do with the relatively high share price. The market has priced in growth and property valuation gains into the share price. As a result, A-Reit Trades at a 69% premium to its Net Asset Value. 

A-REIT is the largest business spaces and industrial real estate investment trust, with assets of around SGD 12.95 B.  This includes business and science park properties in Singapore, suburban office spaces in Australia and US business park properties. The Reit is still mainly invested in Singapore with 70% of its portfolio in the country. 

It is managed by Ascendas Funds Management, an indirect wholly-owned subsidiary of Capitaland Limited, which owns 19% of Ascendas Reits’ outstanding units.

Ascendas Reit’s vision is to be a leading real estate investment trust that delivers predictable distributions and achieve long term capital stability for unitholders. What this means is that Ascendas Reit will be focused on achieving stable distribution and will be looking at dpu accretive acquisitions that can create additional value for its unit holders. These two are somewhat similar but not entirely the same.

To achieve stable distribution often takes the form of getting high quality tenants, achieving high occupancy and a proactive lease management. Creating additional value requires that Ascendas reit purchase new investments at an attractive hurdle rate. Further, these acquisitions must be financed in a manner that is distribution accretive to the unitholders.

For 1H 2020

Gross revenue for the first half of 2020 grew 14.6% from 454 million to 521 million. Net property income also grew 12.2 % YoY. Net Property Income grew less than gross revenue due to the increase in property operating expenses. However, due to the increase in FX differences, total return for the period was down 1% yoy. 

For FY2014-2019

Over the last 5 years, revenue growth averaged at 8.6% yoy. Revenue increase from both rental reversion and increase in the size of its property portfolio. Net property income increased 11% yoy.

Ascendas Reit has a Return on Invested Capital with an average of 5.17% in the last 5 years. It reached a peak of 5.84% in 2017 and declined to 4.51% in 2019. While A-Reit continues to make a positive economic spread of around 0.3%, its weighted cost of capital is around 4.2%. This means that Ascendas Reit has been finding it increasingly difficult to get a positive spread on every dollar of invested capital. This is not surprising as new acquisitions continue to be relatively expensive, relative to A-Reit’s cost of capital.  

Given a Weighted average cost of capital of around 4.2% and a Return on invested capital of 4.6%; we found that assuming the following

• a perpetuity growth rate of 2.15%
• current year Net Operating Profit After Tax of SGD 606 million
• an average 4% Revenue Growth for the next 6 years

will get us to an intrinsic value of SGD 3.07, which is close to the current share price of SGD 3.02.  While there are other combination of values that can potentially help us arrive at a share price of SGD 3.07, we found these scenarios to be the most plausible.