For some time, REITs have been my preferred investment instrument. As mentioned in an
earlier post, some screening criteria which I had formulated are:
- Low gearing, i.e. < 35%
- Presence of a sponsor, preferably a strong one, eg. Capitaland, F&N, etc
- High yield, preferably > 8% p.a.
- Discount to NAV, i.e. paying less for more
- Quarterly distributions (as opposed to semi-annually)
- Portfolio mainly in Singapore
The reader can perhaps notice that the list of 6 is split into 2-2-2. My current thinking is that 1-2 now form the '
pre-requisites' (i.e. the counter should possess these two characteristics before I even begin to consider entering), 3-4 would then constitute the '
buy signals' (i.e. they will indicate to me when to enter the market) and 5-6 are '
preferables' (i.e. good to have but not a must for me at this point in time).
Pre-requisitesThese should be self-explanatory, although the strength of a sponsor can be debatable. For me, I should frequently remind myself of the 2008 financial crisis during when credit had dried up to a trickle. During such times, low gearing helps REITs to remain on a stable footing and having a sponsor would perhaps increase the REIT's chances of securing hard-found credit.
Buy signalsI have an untested and unproven theory that the market prices of REITs generally have upper and lower bounds. Based on my own observations, there are possibly two metrics:
- Yield
Defined simplistically as (quarterly DPU x 4 / market price), each individual REIT's price might fluctuate within a certain range. This range would vary from REIT to REIT depending on the strength of its sponsor, past reputation, etc. When the market price falls to a point where the computed yield based on the last announced DPU reaches the upper bound of the range, this may present a buying opportunity.
- P/NAV
Similarly for the P/NAV ratio, this might again fluctuate within a certain range which would vary depending on the sponsor, reputation, etc. At the low end of this range, a buy signal may be detected.
PreferablesJust to remind myself, quarterly distributions are better for me in terms of my personal cashflow and having its portfolio mainly in Singapore will enable me to have a more intimate feel of a REIT's operations.
For future posts on this topic, my self-assigned homework is to collate past records of yield and P/NAV to verify or disprove my theory on buy signals.
Cheers!
Disclaimer: these represent merely my own personal amateurish views on the subject =)
It has been some time since my brother and I started our AUD & NZD fixed deposits, more specifically we are just one quarter short of 3 years.
