When Price of a share is less than the net asset value of its shares, it simply means that you are buying that “property” at a discount. Here are 3 examples of REITs and real estate development companies (REDCs) having NAV higher than their Share price.
| Name of Reits | Current Share Price | Net Asset Value | P/NAV |
|---|---|---|---|
| Capitaland (C31) | $3.52 | $5.37 | 0.656 |
| Fraser Property (TQ5) | $1.73 | $2.58 | 0.67 |
| Keppel Reits (K71U) | $2.31 | $1.37 | 0.901 |
Why are we even talking about REITs?
Real Estate Investment Trusts are companies who owns and manages a real estate or property. People usually invest in REITs for passive income via dividend payouts. In fact, REITs are required to distribute minimally 90% of its profits to shareholders therefore REITs have higher distributions rates as compared to regular share counters. For REDCs, they are not obligated to distribute 90% of its profits as dividends.
Why so Cheap?
1. Limited Volatility
Due to several reasons such as higher distribution rates (dividend payouts), REITs tend to have issues such as stagnant price movements or sometimes even depreciating share prices. Take a look at Sabana REIT below
The current price of $0.445 has a P/NAV ratio of 0.792. Distributing $.0.032 on average per year (7.146% yield). With the high distribution rate, price of the share has fallen to near 33% of its peak.
2. Nature of the Real Estate businesses
Real estate businesses are mostly through collection of rent for income. Thus there is hardly any change in its performance. Furthermore, since rent and leasing of business space is its main business, it also means that there is potential for spaces to be vacant. Therefore, there is also a chance for REITs to be under performing due to weaker occupancy of its properties.
3. Expansion is costly and limited
REITs which are based in developed nations usually replicates it’s business models across the country. Therefore there are limits for innovation, cost savings for newer properties and increase in profit margins. Furthermore, there is also increasing cost for maintenance for matured properties which will also cause dips in profits over time.
Overall, REITs are still popular income generating investments. However, do your due diligence before buying in. Also, consider the total investment quantum with respect to the actual yields. For example, if the REITs is only $0.80 per share. You will need to buy a substantial amount of shares for any significant dividend payouts per year thereby increasing risk when the REIT Price dives due to poor market performance.
Before buying shares, find out more about risk and picking your own watchlist.
