Why is a REIT’s gearing ratio important?
The gearing ratio for a REIT is an important indicator as to how healthy it is. Higher gearing ratios mean that the REIT is paying banks and bondholders a higher amount of interest expense, and that would mean a lesser amount of money available for distribution to you as investors.
If there’s one thing to take away from this post, a lower percentage of gearing is always better than a higher one.
Two reasons for this
- Interest expense is likely lower, resulting in a higher net property income margin
- These REITs have more debt headroom for future acquisitions compared to other REITs that have a gearing level closer to SGX’s 45% limit.
Average gearing ratio for Singapore REITs
Across the Singapore REIT market, the average gearing level is 34.6%. It differs across various sectors, with office REITs having on average the highest amount of gearing at 36.3%, followed by industrial at 35.7%, hospitality at 34.8%, healthcare at 34.1%, retail at 32.8% and data centres at 27.7%.
How to pick REITs based on gearing levels
If you are looking to pick a REIT, one way to filter out of the 37 available is to pick those that have a lower than average gearing level.
In this case, you’ll know that if interest rates, these REITs won’t get punished by the stock market for having a higher than average gearing ratio.
One thing I know is that institutional investors sometimes like to compare figures to averages. Such as year to date returns versus a past 5 year average, present P/B ratio versus past 5 years etc.
When they start comparing gearing ratios to decide which REITs to take profit on, one filter they would probably use is the individual REIT’s gearing level compared to the market.
5 REITs to look at with low gearing levels
Here are 5 REITs that have low gearing for your consideration to invest in.
- SPH REIT (25.6%)
- Keppel DC REIT (27.7%)
- EC World REIT (29.2%)
- Frasers logistics and industrial trust (29.3%)
- Mapletree Industrial trust (29.8%)
With the exception of EC World REIT, one look at these REITs show they also have some form of corporate governance. The sponsor is strong and reputable, and is likely to be helpful to the share price.
On a macro-basis, these REITs also operate in a decent macro environment. For example, SPH has a balance of one city centre and one suburban mall, allowing it to capture both discretionary and non-discretionary shopper trends.
Keppel DC REIT has good exposure to a fast growing data centre industry. Frasers Logistics is mainly focused in Australia where the industrial trends are healthier than in Singapore while Mapletree have a sizable industrial portfolio outside of Singapore, giving it some diversification benefit.
For more information on Singapore REITs, check out this handy table.
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