Tips on evaluating a Reit

JUST as people are judged by what they wear and how they look, real estate investment trusts (Reits) are usually judged by their yields and net asset values (NAVs). This is an overly simplistic approach that can catch investors off-guard when a Reit turns out to be riskier than they thought, or when professional valuations of properties implied by the NAV change drastically when economic conditions and market sentiments turn.

Yield, or more precisely historical yields here, refer to the distributions per unit a Reit paid investors in the past year divided by its current share price. NAV refers to the most recent valuations of the Reit's assets minus its liabilities like debt. Investors tend to look at whether a Reit's share price is trading at a premium or discount to its NAV per unit to see if there is scope for price appreciation.

High yields do not mean a Reit is an attractive buy, however. Yields are related to risk and growth potential, as investor Bobby Jayaraman pointed out in his 2012 book on Reit investing, Building Wealth Through Reits. The safer the Reit and the higher its growth potential, the lower its yields will be. This is because high demand from investors for these assets pushes up their price, thus lowering yields.