Enjoy the Benefits of Owning Multiple Properties With Just a Few Thousand Dollars

Most people know the great benefits of investing in a portfolio of properties. Not only do you get the steady capital appreciation of property over time, you also get the monthly passive income from renting it out. Holding a property over the long-term will see the rental income paying for the property itself. In fact, most of the richest people make their money through property investment, myself included.

The US property market is at one of its lowest points in the last twenty years and investing in the right real estate today can yield smart investors spectacular profits over the next few years. A stable government, increasing population and new economic growth drivers coming from the new Integrated Resorts should also see property in Singapore appreciate over the long-term.

In the past, the ability to invest in a portfolio of residential, commercial and industrial property was only a game for the rich. You had to have a few hundred thousands of dollars to a few million to start playing the game. Today, with the creation of REITS (Real Estate Investment Trust), small investors (with a few hundred-thousand dollars) can participate and enjoy the benefits of real estate investing.

For those of you who are new to REITS. Here is a quick introduction. A Real Estate Investment Trust (“REIT”) is a publicly listed company that raises capital (from shareholders) to purchase and operate real estate assets (i.e. shopping centres, office buildings apartments etc…). Over 90% of the rental income generated from these properties is then distributed back to the shareholders as dividends (DPU: distributions per unit) at regular intervals.

There are numerous REITs available in the stock market. So, how do you select a good one. Let me share with you my 5 Criteria for REIT selection.

Criteria #1: High Current Dividend Yield (> 5%)
The main reason for buying REITs is for their high dividend payouts. So, the first screen is to select REITs with the highest dividend yields. Dividend Yield should be more than 5%. Dividend Yield = Annual DPU/ Current Price x 100%.

Criteria #2: History of Consistent Growth in Free Cash Flow & Dividends
Select REITs that have a track record of achieving consistent growth in Free Cash Flow and dividends for the last 5-10 years.

When a REIT is able to consistently grow its cash flow and dividends, you will get consistently higher dividend payouts and capital appreciation from the stock price increase.

Criteria #3: High Expected Cash Flow & Dividend Growth

Select REITs that are expected to deliver higher future Cash Flow and dividend growth over the next 1-5 years. These are REITs that have:
• Quality of properties in portfolio and quality of tenants
• Expected increase in property prices
• Expected increase in rental
• Acquisition of new properties

You can find the expected cash flow growth forecast from REIT analyst reports. To see these reports, go to http://sreit.blogspot.com. Ensure long-term growth forecasts are above 5% and analyst reports are rating ‘hold’ or ‘buy’.

It is also important to exercise common sense and actually visit the properties (i.e. shopping malls, industrial estate, office buildings, apartments etc…) held in the portfolio of the REIT you intend to buy. Are the properties in prime locations? Are they very popular with tenants? Is there high traffic? Are the tenants of high quality? Are the tenants likely to stay for long? Think like a property investor!

Criteria #4: Low Gearing Ratio (< 40%)

Gearing Ratio tells you how much money the REIT has borrowed, relative to the value of the property. The higher the debt (gearing ratio), the more risky the investment is. So, check the Gearing Ratio of the REIT. Gearing Ratio = Total Debt/ Total Assets x 100%. Ensure the Gearing ratio < 40% before investing.

Criteria #5: REIT Stock Price Undervalued

Just like buying the stock of a company, always buy a REIT only if its current price is below its intrinsic value. There are two ways analyst value REITS. a) You can value REITS by Net Asset Value (NAV)
or by b) Discounted Value of Its Future Cash Flows.

a) Net Asset Value (NAV). NAV = Total Assets – Total Liabilities. When REIT price is less than its NAV, the REIT is undervalued. You can check out the NAV of a REIT by studying its annual report or looking at analyst reports.

b) To calculate the Intrinsic Value of the REIT using Discounted Cash Flow, use an ‘Intrinsic Value Calculator’. (We give you one when you enroll in our Wealth Academy Programmes). Enter the following variables:
• Current Cash Flow from Ops:
• Total no. of shares:
• Expected growth rate: See analyst reports. If unavailable, take a conservative 3-4% growth rate.
• Risk free rate (US 3-year Bonds) and Beta: See Bloomberg.com/markets/rates and reuters.com/finance/stocks

The Opportunity is Still There
Even after the huge stock market rally over the last 8 months, there are a few REITS in Singapore that are still undervalued, provide good dividend yields and have potential upsides over the long term. Some of my favourites are:

Suntec REIT, selling at $1.38, NAV is at $1.90. Dividend yield 9%
First REIT, selling at $0.865, NAV at $0.92, Dividend yield 8.7%
Lippo Maple Trust, selling at $0.52, NAV at $0.74, dividend yield
Starhill Global, selling at $0.56. NAV is at $0.80. Dividend Yield 6.3%

With the exception of Starhill Global, the other three REITS, though still undervalued, are technically overbought in my opinion. I would wait for a pullback before buying up some more. The way I look at it, the yield of 6%-9% sure beats the miserable 1% or less I will get in the fixed deposit.