Real estate as an investible asset class can house many functions in an investor’s portfolio, if you pardon the pun.
Economic theory and data show that real estate as an asset class has a low correlation to stocks and bonds, making it a potential diversifying tool for the investor’s portfolio. Real estate could also be an inflation hedge as property prices tend to rise in tandem with inflation. Other macroeconomic factors certainly play a part in real estate returns, namely interest rates.
Last year, we pointed out how higher interest rates affect real estate as an investment (See REITs and property stocks get a reality check, Issue 1083, April 24, 2023). This year, it is likely to be the same situation. To reiterate, higher interest rates cause interest expenses to rise; increase discount rates that result in more cash flow needed to be generated by an asset just to maintain its valuation; and increase the cost of capital.
Overall, to the diligent investor, this is a great opportunity to scour potentially undervalued real estate stocks and REITs as the general macroeconomic sentiment is negative. As important as the macroeconomic climate is, it is also equally important to look at the financials of individual companies to determine whether real estate could be added to the investor’s portfolio. The focus of this article will be on public-listed real estate companies and REITs.
The Edge Singapore has filtered a global list of stocks and scored them individually based on several financial metrics. The scores are purely quantitative, and consider the company’s historical financials, yields, profitability, sentiment, financial safety, and a separate valuation which compares the price growth to the weighted value growth over multiple periods.
This weighted value includes revenue, net income and cash flows. The scoring weights for REITs are slightly different though, taking into consideration items such as funds from operations, distributions, and regulatory requirements. The highest scoring companies are stocks investors ought to examine further for qualitative analysis and to be considered for their investment portfolio. Separately, our list of 10 real estate stocks and REITs last year performed rather poorly due to large exposure to China (See also Issue 1083). Chart 1 shows the performance of the 10 stocks & REITs against global benchmarks. We have since refined our quantitative approach for valuing these companies from the previous method which only included limited price ratios, balance sheet analysis and dividend yields.
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Table 1 shows the list of 50 selected real estate-themed companies and REITs, along with their scores and valuation. The top-scoring companies are Singapore-listed Sinarmas Land A26 , New York-listed Prologis and VICI Properties.
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Brief descriptions of the top-five stocks are shown in Table 2.
We have also updated the REIT table for all the Singapore-listed REITs (See Table 3).
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Year to date, the top-performing REITs are Cromwell European REIT (+6.6%) and BHG Retail REIT BMGU (+5.6%) while the worst-performing REITs are Keppel Pacific Oak US REIT (–62.4%) and Prime US REIT OXMU (–43.9%). The REITs with the highest yields are United Hampshire REIT (12.1%) and ARA US Hospitality Trust XZL (11.8%).
Disclaimer: This article is for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This article does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/or after consulting licensed investment professionals, at their own risk.
