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I often have friends who ask “how do I pick the right Real Estate Investment Trust (REIT) to invest in?” and my answer is always the same. I lay out what I tend to look for when I choose a REIT to invest in – and this is the crucial dealbreaker – over the long term.
The goal of REIT investing is a simple one; you want capital growth (of its unit price) and a rising distribution/dividend payout (distribution per unit or otherwise known as the DPU). So, without further ado, here are my top five things I believe investors should look for in any best-in-class REIT.
1. Low gearing ratio
If a REIT has low debt levels, also referred to as the “gearing” or “leverage” ratio, then it tends to instill a certain level of confidence that management is not only responsibly managing debt but is also leaving further headroom for growth. Generally speaking, REITs in Asia need to have gearing that is below the regulatory ceiling of 45%.
Given this, I tend to focus on REITs that have gearing in the late-20s to mid-30s percentage range. That way, you can tap into growth without worrying that the REIT will be overextending itself in the process.
2. Strong sponsor
For any REIT I tend to look at as a potential investment, a strong sponsor is a must-have. A sponsor is the parent company of the REIT that can provide support for the REIT, for example by offering the REIT a pipeline of properties where it will have right-of-first-refusal (ROFR). Sponsors also tend to be major shareholders within the REITs themselves.
Diversification is one of the basic tenets of investing and can also apply to REITs. In terms of REITs though, it’s diversification by tenants and, to a lesser extent, geography. I prefer to look for REITs that aren’t too heavily reliant on one specific tenant for its revenue as this can potentially jeopardise the DPU should that tenant move out or significantly cut its occupied space.
Similarly for geography, it might be preferential to have a REIT that has at least a small level of overseas exposure rather than being focused 100% on one particular country for its revenue.
4. Consistently rising DPU
This might seem an obvious one to readers but for REITs, a solid track record in consistently increasing its DPU is a valuable asset. Effectively it means that investors can comfortably rely on their investments for future income streams. What should be identified with any potential REIT is to aim for ones where the annual DPU is growing at least in line with inflation and has done so for a number of years (ideally over five).
A high distribution yield for a REIT might look attractive at first sight but it’s even more important that the DPU has been growing and is sustainable.
5. Longer weighted average debt maturity
Again, this comes back to responsible fiscal management on the part of the REIT. Ideally, when you invest in a REIT, you want the management to be prudent in managing the debt it takes on to grow the portfolio. Part of this involves how often the REIT has to roll over debt. If the REIT can lengthen the time required to roll over this debt then it can give itself breathing room in terms of how much interest it pays on those loans.
Taking a holistic approach
It’s worth reminding investors who are looking at REITs, that the above is a great starting point to identify the best REITs. Of course, you should also look at a variety of other factors. These can include, but are not limited to, the weighted average lease expiry (WALE), growth of average rental rate or portfolio occupancy rate.
However, if investors can get the formula right for investing in REITs then sustainable long term income and capital growth are easily within reach.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.