Get paid to wait for recovery

As cheap, high-yielding investments, professional investor Joseph Wat likes real-estate investment trusts. You get a steady income, and they have the potential for big gains should asset values rise again. Here, he picks three of his Singapore-based favourites.

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.

TABLE.ben-table TABLE {BORDER-RIGHT: #2b1083 3px solid; BORDER-TOP: #2b1083 3px solid; FONT: 0.92em/1.23em verdana, arial, sans-serif; BORDER-LEFT: #2b1083 3px solid; BORDER-BOTTOM: #2b1083 3px solid}TH {PADDING-RIGHT: 5px; PADDING-LEFT: 5px; FONT-WEIGHT: bold; BACKGROUND: #2b1083; PADDING-BOTTOM: 10px; BORDER-LEFT: #a6a6c9 1px solid; COLOR: white; PADDING-TOP: 10px; TEXT-ALIGN: center}TH.first {PADDING-RIGHT: 2px; PADDING-LEFT: 2px; PADDING-BOTTOM: 5px; BORDER-LEFT: 0px; PADDING-TOP: 5px; TEXT-ALIGN: left}TR {BACKGROUND: #fff}TR.alt {BACKGROUND: #f6f5f9}TD {PADDING-RIGHT: 2px; PADDING-LEFT: 2px; PADDING-BOTTOM: 5px; BORDER-LEFT: #a6a6c9 1px solid; COLOR: #000; PADDING-TOP: 5px; TEXT-ALIGN: center}TD.alt {BACKGROUND-COLOR: #f6f5f9}TD.bold {FONT-WEIGHT: bold}TD.first {BORDER-LEFT: 0px; TEXT-ALIGN: left}

The Reits Joseph Wat likes

12-month high12-month lowNow
Fraser CentrepointSG$1.38SG$0.45SG$0.59
K-ReitSG$1.53SG$0.49SG$0.49
Suntec ReitSG$1.68SG$0.53SG$0.54

Recommended

Beyond US tech stocks: three global stars to buy now
Share tips

Beyond US tech stocks: three global stars to buy now

There is much to like about the US tech giants, says professional investor Alec Cutler of Orbis Investments highlights. But there are many other excel…
1 May 2021
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
19 Feb 2021
The charts that matter: inflation gives markets a scare
Global Economy

The charts that matter: inflation gives markets a scare

Markets took fright this week as it looked like inflation was picking up in the US. Here’s what happened to the charts that matter most to the global …
15 May 2021
Central bank digital currencies: the future of money
Currencies

Central bank digital currencies: the future of money

The rise of cryptocurrencies and a move to cashless payments during the pandemic have left states and central banks playing catch-up. Are new forms of…
14 May 2021

Most Popular

How will Joe Biden’s capital gains tax rise affect crypto prices?
Bitcoin & crypto

How will Joe Biden’s capital gains tax rise affect crypto prices?

The US president wants to increase capital gains tax – and that’s going to hit a lot of American cryptocurrency speculators. Saloni Sardana looks at h…
14 May 2021
Inheritance tax planning: the rules around gifting
Inheritance tax

Inheritance tax planning: the rules around gifting

There are plenty of legal ways to minimise an inheritance tax bill. Perhaps the simplest is to give away assets to reduce the size of your estate. Dav…
11 May 2021
Are we nearing the end of the negative bond yield era?
Government bonds

Are we nearing the end of the negative bond yield era?

As inflation gets going, the era of the negative bond yield – that investors have to pay governments for the privilege of lending them money – might b…
14 May 2021