Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Joseph Wat, managing director of Atlantis Investment Management (Singapore).
There’s no lack of value in this bear market. But buying value without a catalyst for stocks to rise could mean sitting on the investment for a long time, with the opportunity cost that involves. One option is to buy cheap-looking, high-yield stocks. We screen over 600 stocks in Asia ex-Japan with more than US$200m market capitalisation using the price/book-value ratio (P/BV). We also look for dividend yields that would help compensate for any opportunity cost during a long downturn. Six of the 20 cheapest P/BV stocks, and four of the ten highest-yielders, are real-estate investment trusts (Reits).
Singapore is the region’s Reit pioneer. As of 28 February, the FTSE Singapore Reit index has fallen 65% from its peak, to its lowest point since the first Reit listed there in 2003. The sector trades on a P/BV of 0.1x to 0.6x, cheaper than many property firms; yet, due to tax incentives, Reits offer superior yields over traditional property investments. Earnings are also not as volatile as, say, a property developer because rentals are usually locked in for two to three years. Reits have largely been ignored due to fears over refinancing, and concerns over falling rents and occupancy. The latter two reasons are revenue related, but falling revenues are a problem for all sectors, not just Reits. Refinancing is certainly a risk as Reits are geared. But this risk can be cut by analysing the strength of the balance sheet, and also the sponsors behind a Reit.
Fraser Centrepoint Trust (SG:FCT), a suburban retail Reit, is owned by Fraser & Neave, a food and beverage firm with links to Temasek (Singapore’s sovereign wealth fund) and banking group OCBC. In past downturns, rent and occupancy levels of suburban retail space were the sturdiest due to a lack of supply and tenants catering to non-discretionary spending. With no major refinancing risks in the next two years, we expect distribution to remain stable. The P/BV is 0.5x and the yield is 11.5%.
K-Reit (SG:KREIT) is an office Reit run by K-Reit Asset Management, a wholly owned unit of Keppel Land, a Temasek-linked company. The portfolio consists of mainly Grade A office property. Average rental for 2008 was only $7 per square foot (psf) a month. Yet even with the collapse in office rental, Grade A office rental is still hovering at $10 psf a month. Hence, rental rates should rise. A rights issue was completed last year and it will not need to refinance any debt till 2011. It trades at a P/BV of 0.26x and yields 14%.
Suntec Reit (SG:SUN) is a retail-cum-commercial Reit, managed by ARA Asset Management, an affiliate of property group Cheung Kong. Its main asset is Suntec City, an office/retail development within walking distance of the new LV Sands casino, which will be ready in 2010. A total of $800m in debt is due for renewal by the end of this year, which could be via a combination of rights and debt issue. We expect a favourable outcome given the attractive asset and strong sponsor. It trades at a P/BV of 0.3x, and yields 15%.
The credit markets will not be frozen forever. When asset values rise again, the leverage effects of Reits will be huge and they will be an asset class to be loved again. And with a Reit, you are being paid to wait – not to be sniffed at in this near-zero interest-rate world.
The Reits Joseph Wat likes
| 12-month high | 12-month low | Now | |
|---|---|---|---|
| Fraser Centrepoint | SG$1.38 | SG$0.45 | SG$0.59 |
| K-Reit | SG$1.53 | SG$0.49 | SG$0.49 |
| Suntec Reit | SG$1.68 | SG$0.53 | SG$0.54 |