How to value REITs in Singapore?

Hi, welcome to this new video. Today the topic is real estate Investment Trust or REITs. And specifically what I want to discuss with you is how can we value a reit? Why? Because usually when you buy a reit, you do it for passive income to get the dividends. And the main point is the best strategy to get a good amount of passive income is to buy when is undervalued. So now the next question is, how do we know when a REIT is undervalued? Now, there are two ways you can assess the value of a reit. One is called the absolute valuation method. The other one is the relative method. And I will show you both. And also we show you why I prefer the relative method. So of course, here we are speaking about Singapore REITs, because that's the kind of REITs I'm interested in. And just for today, the example we take is Capital Mall Trust. That is a quite strong REITs in the retail sector in Singapore. And here you can see the chart. You can see like in the last three years is doing quite well. Now let's start with the absolute method. What is the main idea? Well, this is based on the dividend discount model, where first we want to understand how the dividends are increasing over the years. Why? Because of course, we don't want to buy a REIT that is giving us less and less dividend. We want a REIT that is paying a stable and possibly increasing amount of money in terms of dividends every year. Right? So the first thing is we have to understand what is the growth of these dividends. And then we use this number to get the value of the reit. So let's look at the capital model as example. Okay? Here in this Excel file, I have basically data for REITs in Singapore that I have collected. And then we are just considering capitalmol, this rule, right? So here I have for the 2014-17, the dividends that capitalmol paid. Now, I don't have 2018 because actually after a few tests, I realized that this method, to me at least, doesn't work. So I stopped using it. But just for showing you how to use it, let's take capital Molly. Now the first thing to do is this. We have to take a period and in this case is four years, and we have to understand what is the annual increase of dividends. So an easy formula to do that is the we take the last data, so the dividends paid the last year over the dividends paid the first year, right? And then, and then, well, better if I Show you actually, so it's easier. So what is the idea? You take the dividend last year over the dividend first year. And remember, when I say last and first year, I mention the period you are considering. Okay, so of course, this is another question for the absolute valuation method. How long, how long is this period? Is it the last three, four, five, 10 years? Ideally, I would say at least take four years. You can take more. Better. Now you take this ratio, okay? And then you, you use this number years 1. So this is the power of operation. Okay? So you take this ratio and then you have to elevate to one over the numbers of years minus one. So if we consider four years, this number is three. And then you remove one. And what you get is what? Well, is the dividend growth percentage. So let's see what we get when we use the example of capital. Okay, so we are here, right? We have four years of data, okay, so what do we need to do? Well, we take the last one, so 0.1116 over 0.1084. So this is the first ratio, right? Now we have to elevate these two, one over three because we have four years, remember, we have to elevate to one over number of years minus one. So this is the operation. And then one over three, okay? And what do we get this? And then we have to remove one. Okay? So we get this number that if you see is the same we have here because I have already coded this operation in Excel. So what this 0.0097 means. Okay, let's write it here. So for capital mole, we get 0.0097. This means that the grow, the grow rate for the dividends is. The yearly grow rate for the dividends is 0.97%. Okay? And actually if you look at the number, it makes sense because you see is more or less stable. 1084-1125-1113-1116. Now, as I say, one of the issues of this method is how many years do you consider? But the other issue is here we are considering the first year and the last year, right? So if our time frame is, let's say this is yearly dividend, right? And then we consider 4, 5, 6, right? And then every year we have the dividends, right? We basically don't consider what happens in the middle. We may have a growth like that, right? And what we consider is only this point and this point, right? And we just want to find a kind of average growth during this time. But if this guy was actually like that okay, we would have obtained the same result. So this is another thing I don't like too much of this method is that you just consider the extreme points and then you don't look at what happened in the middle. Of course, one may modify the method, for example, to use different timescale and then take an average. But this is something else. What I wanted to highlight here is the possible issues you can have in using this method. Now what do you do when you get this number? Well, now you have to compute what is called intrinsic value. That means the value, the let's say fair value of a share. So what do you do? Let's go here. So say that we have this number, okay? 0.0097. And now we have to use a formula that can tell us in the future what will be the fair value of the REIT. Okay? So we have the dividend growth 0.0097. Now what is the intrinsic value? So the formula is this. First we have to know for how many years we ideally want to keep the REIT. Now REITs usually are long term investing instruments. So we may keep it for 10 years, 15, 20 years. Let's say we want to holding period is 10 years, okay? And the other thing we need to know is the inflation, right? Because everything we are computing should be discounted with inflation. Let's say inflation is 0.04, that is a 4%, right? Now, when we have these three things, what do we do? We take the last. Year dividend, okay? Or even better, if you have the last the trailing 12 months, okay? So the last 12 months dividends. And then you multiply by this, okay? So it is 1 plus this dividend growth, this number over 1 plus the inflation, okay? Plus the same thing, But this time these two terms are square. And then you do the same with power of 3, 4 and you end up with this. Where the power is your holding period. Actually even better if we write holding period, okay? And this is your intrinsic value. So again, let's repeat. First thing you have to do here is to compute the dividend growth using this formula, okay? And after that we have to identify holding period. That to be conservative you can take 10 years and inflation. And then with this formula, so the last dividend, let's say the last year or the trailing twelve month dividends times this thing where you have numerator is one plus the dividend growth, this value denominator is one plus inflation. And you sum these terms and every time you sum, you have to multiply by I Mean you have to use different exponents like here is 1, here is power of 2, 3, 4 and then you went with power of 10 in this case your holding period. And then you sum this thing and then you obtain your intrinsic value. Intrinsic value. That means a fair value for the reit. If the trading price is above intrinsic value then I can say okay, the REIT is overvalued. If it's below, then the REIT is undervalued and I may buy. Now what is the problem here? Have a look here. This is the intrinsic value computed with 15 years formula instead of 10. And just to give you, I mean if you click here you will see Basically I coded the same thing that I told you. Now the intrinsic value that I compute this way for capital mole is 1.34. So 1.34 means that if I want to use this method, what I should do is to wait for the price to go below 1.34 and then I can buy. Now let's have a look at the chart. This is the last three years chart and you can see very well that even the low prices here are around 1.87. So it's so far from the intrinsic value that basically this read Capital mu. That is quite good. If I use the absolute value method, I will never buy. Why? Because it's too overvalued, Right? But actually it's a good read. So when I was saying that the absolute valuation method, to me it's not something very good is because many times when you use this method to compute the intrinsic value and I've done here for many reads, of course only those for which the DPU grow is positive because if it's negative I put zero. I don't use this. But for many reads you find some intrinsic value that are too far from the real price. So basically you would end up buying nothing. Now just to conclude this part, if you are wondering where you can find the dividend information here, I'm using this tool chartnexus where they give you the dividends. But there is a website if you want I will put the link in the description for Singapore that will give you the information about the dividends for the REITs. So this is capital more starting 2003. So you have a lot of data. Now what is the other method that I use? The other method is the relative. Let's clear this. The other method is called relative evaluation method. And basically what we are looking at is the price over nav. Sometimes it's called price over book. I Mean it really depends on the book or the course or wherever is written. But sometimes it's called book. So you have something called PB ratio. But basically it's the same thing. So what is the idea? Okay, the price is the price of the reit, of course. Okay, so the trading price, nav, NAV or book is the net asset value. That means basically the asset of the reit, the total assets minus. Total liabilities. Okay, so in a way is the value of the REIT and of course when we are using the nav, here actually is the NAV per unit. Okay, why? Because this is the total value of the reit. But this is the price of one share. Right? So we have also to divide the NAV is the NAV over the number of shares. Right? So this is the price of one share and this is the navigation relative to one share. Okay, but don't worry, you don't have to compute this by yourself. There are website that we show you one after in a while where you can get this value. Now what is the idea here? If price over NAV, okay, let's call it NAVP is equal to 1, then the price you are paying is fair. If is above 1 is overvalued and if it's below 1 is undervalued. Okay, so this is the idea. Great, I don't like this idea. Why? I don't like. Let me show you. I mean it makes sense in practice, right? You say okay, if the price I'm paying is more than what the REIT is worth is overvalued. But there is an issue with this. Let's go here. Okay, Here just to show you, here is where you can find the price over nav. Okay, I will put the link in the description. And again, this is for Singapore REITs. Look at this chart, that is what I really use. Okay. This chart basically showing the historical, I think one year of price over NAV range. Meaning in the last year what was the lowest and highest price over NAV for the different REITs. Now what is the problem? There are some REITs like this one, this one, this one, this is the value one. Okay, the below is technically undervalued and above is overvalued. But you see that for some reads is never below one is never undervalued. Right? So you may have the same issue as the absolute valuation method where you find a value that is always very very far from the price. So you will never buy. So what is the better strategy is not to look at the price over NAV per unit. But look at where the price over NAV is compared to the historical range. So if you are like here a price over NAV that is very low, right? Or in the lower range, you see, or this, for example, this, then you can consider this as undervalued. But if you are in situations where the price over NAV is very high, or let's say above mid range, even something like that, you know, or this or this, then is overvalued to me. And of course when the price over NAV is low, doesn't mean you have to buy. You have to understand why the price over NAV is low. Because one reason may be that the price dropped a lot because some bad news or maybe there is some other reason why this REIT is very undervalued. So you need to check. Of course this is only one of the criteria you should use. The REIT should be strong fundamentally. Okay, so provided that is a strong reit, then you can have a look at this to understand when is the right time to buy. Okay, Just to show you a last thing, okay, here in the chart. Another thing I would like to say is that when you find an undervalued reit, I always suggest you to have a look at the chart because let's say that for some reason the rate is undervalued, but for example is very far from the moving average like now here or is, you know, here for example, it was bouncing on this range. So just have a look at the technical to time to better time your entry. Okay? So of course good to have undervalued read and better in my opinion to use the relative method because the absolute method doesn't really give you consistent results. When you use the relative method, check on the website again here if you are in the low or high range. And then also do a check on the technicals to see to avoid situation where you are buying something overextended or something that is close to a resistance level. Okay, with this I would like to conclude the video. Thank you for watching. If you have question, please write a comment and put a like if you like the video and subscribe to the channel. If you you want to be updated when I will upload new videos. So for now thank you for watching and see you next time.