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Value Opportunities in Asia Pacific REITs (ex-Japan)

By July 20, 2020 No Comments

Value Opportunities in Asia Pacific REITs (ex-Japan)

With countries around the world gradually reopening their economy, REIT and the commercial real estate industry will play a big role in protecting tenants, patrons and communities in general.

In the Asia Pacific region, REITs account for a sizeable proportion to their respective markets. In this aspect, the industry could be seen as a proxy to the region’s economic recovery. In Singapore for instance, the REIT sector has a combined market capitalization of $98 billion, representing 12% of Singapore’s listed stock as of 31 May 2020.

Coupled with the market dislocation from Covid-19 crisis, the current landscape has presented some interesting value opportunities in regional REITs.

Asia Pacific REITs Attractively Priced Now

In recent years, a phenomenon of “internationalization” has been occurring amongst S-REITs. Existing local REITs have been seen expanding portfolio exposures to include other overseas assets, casting a spotlight on the growth potential of offshore assets.

Source: PCM, Bloomberg as at 12 June 2020

Because of uncertainty brought about by Covid-19 crisis, acquisition appetite may have waned as REIT operators seek to conserve cash. Nonetheless, we see valuations of Asia Pacific REITs (ex-Japan) are currently trading at seemingly attractive levels. As of 12 June 2020, REITs listed in Hong Kong, Malaysia and Australia are trading significantly discount to their book value.

Against REITs listed in the US, Asia Pacific REITs (ex-Japan) are trading at significantly lower valuations as a whole. To specify, US REITs are currently trading around 2.01 times price-to-book value while the next most expensive market in Asia Pacific (ex-Japan), is the Thailand REIT industry currently trading around 1.28 times P/B.

Source: PCM, Bloomberg as at 12 June 2020

Despite trading at significantly lower valuations, yields of Asia Pacific (ex-Japan) REITs – apart from Malaysia – are also more attractive compared to the US counterparts.

Specifically, REITs listed in Hong Kong are most attractive, with average trailing 12-month yield standing at 6.53% as of 12 June 2020. Australia REITs and Thailand REITs are also offering rather compelling yields at 5.93% and 5.64% respectively. Meanwhile, the average yield for US REITs was 4.58% while the average yield for S-REITs was 4.63% as of the same period.

What Is Not Priced in?

With the gradual reopening of economies worldwide, uncertainties of new waves of infections pose a major overhang for Asia Pacific REITs. For one, with expectations that business activities may likely remain muted despite the gradual reopening, rental reversions will continue to be weighed upon as tenants struggle to remain in occupancies.

With the exception of Hong Kong which is currently embroiled in protest and political unrest, the current valuations – in our view – of Asia Pacific REITs seem to suggest that short-term headwinds are being priced in with expectations that the unprecedented levels of stimulus policies that would begin to filter through economic activities in coming months.

However, the lingering concerns about Covid-19 continue to overshadow investment decisions, and investors remain cautious. One overlooked aspect that may bode well for REITs in the longer term is the delays in construction and cancellations of new developments. This is because the lower new supply of commercial properties coming through from the pipelines will improve the demand situation for REITs going forward.

Tapping into Asia Pacific REITs Through Phillip SGX APAC Dividend Leaders REIT ETF

At the moment, Asia Pacific (ex-Japan) REITs are not just potentially a recovery play but a proxy to Asia’s secular growth story. Phillip SGX APAC Dividend Leaders REIT ETF offers investors the opportunity to tap into this theme through a diversified portfolio of Asia Pacific (ex-Japan) REITs.

Importantly, Phillip SGX APAC Dividend Leaders REIT ETF follows a smart beta strategy that ranks and weighs underlying components based on total dividends paid in trailing 12-month period. Compared to traditional market- cap-weighted REIT ETFs, Phillip SGX APAC Dividend Leaders REIT ETF seeks to enhance income and return stability to investors.

Phillip SGX APAC Dividend Leaders REIT ETF is weighted by total dividends paid and not by dividend yield. The methodology works to avoid the high dividend yield trap, i.e. not all high yields are good yields. More often than not, high yields are a result of plunging share prices and are unsustainable. “Total dividends paid’ also indicates the strength and parentage of components REITs, which also dictate the size and liquidity of the individual components. Ultimately, it also helps to reduce the risk and volatility of the ETF.

Allocation-wise, Phillip SGX APAC Dividend Leaders REIT ETF is skewed towards Australia REITs (50.8%), with major allocations in Singapore REITs (34.8%) and a lesser proportion to Hong Kong (12.1%) and Thailand REITs (1.5%).

Source: Phillip Capital Management (“PCM”); as of 31 May 2020.

Looking into the Australian property market, some data points have indicated to us about the strong resiliency of the industry, and further supported the positive fundamentals about Australia’s property market.

From data tracking the monthly asking price change of commercial rental properties in Australia conducted by Commercial Property Guide, asking rents in commercial properties across each sub-sector (office, retail and industrial) has remained positive since the outset of the pandemic.

Interestingly, asking rents in the retail sub-sector has seen a strong positive increase during May 2020 (1.38%) and June 2020 (1.27%). This further reinforces of view that sentiments for Australia REITs are also improving along with its gradual reopening.

Source: Commercial Property Guide (Australia); compiled by PCM

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