Mr Market has not be kind to REITs year to date. REITs share price has been pummelled by rising bond yields and declining property valuation especially REITs with overseas properties.

As a result, the FTSE REIT index has declined by 10.9% to 647.29 points year to date. Many investors have been picking up REITs which has been bashed down to cheap valuation.

However, despite the cheap valuation, there are a few REITs you might want to avoid at all costs. Here are 3 junk REITs you might want to skip. I disregard the US office REITs as I consider these REITs beyond hope.

Suntec Real Estate Investment Trust

Suntec REIT share price has declined 9.76% year to date slightly outperforming the FTSE REIT index. However, Suntec REIT share price has declined by a whopping 42.78% for the past 5 years.

The dividends collected cannot even cover the capital loss. In fact, Suntec REIT has an annualised return -5.25% including dividends. As mentioned before REIT share price performance is driven mainly by DPU.

From the table below. Suntec REIT DPU has declined from 10.03 cents in 2016 to 7.135  cents in 2023. However, many analysts still call a buy on this REIT.

In its FY23 results. DPU declined by 19.7% to 7.135 cents. Gearing ratio is high at 42.4% while interest coverage ratio is at 2.4x which is also considered low. Investors need to take note of these 2 red flags in Suntec REIT

Many investors and analysts like to use NAV to value a REIT. However, as seen from the case of Suntec REIT, its NAV is always much much higher than the share price and yet is still way underperform in terms of share price.

Investors have this thought that if invest in the long term, the share price will go up and recover and shows its true value. However, this is clearly not the case for Suntec REIT. In face, its share price has declined 28.39% since 2010!

As such, this is definitely one of the 3 REITs you might want to skip. You can view the REIT website here.

Mapletree Pan Asia Commercial Trust

Mapletree Pan Asia Commercial Trust (MPACT) share price has declined by 14.94% year to date. In fact, since the announcement of the merger between Mapletree Commercial Trust and Mapletree North Asia Commercial Trust in Dec 2021, the share price has declined more than 29%.

This clearly proved that the merger did not benefit shareholders and in fact destroy shareholders’ value.

In its 3QFY23/24 results ended 31 Dec 2023, net property income is up 1.7% to S$182.4 million while DPU dropped by 9.1% to 2.2 cents mainly due to higher finance costs.

Year to date DPU dropped by 10.1% to 6.62 cents. Gearing ratio is relatively high at 40.8%. Interest coverage ratio is also low at 3.0x. In addition 21% of the debt will mature in FY24/25 and this could result in even higher financing costs.

With China and Hong Kong properties valuation in the doldrums and deteriorating financial metrics, this is one REIT I will definitely avoid putting in my watchlist. You can view the REIT website here.

Starhill Global REIT

Starhill Hill Global REIT share price has declined by 10.38% year to date. In fact the share price has declined by more than 40% since 2007. Its annualised return including dividend is negative 1.31%.

This clearly shows investors who bought the REIT and kept the REIT since 2007 and hoping to collect dividends would have lost money in this REIT.

Starhill Global REIT reported net property income increase by 0.3% to S$74.5 million in its half year results ended 31 Dec 2023. DPU decline by 2.2% to 1.78 cents. In fact, Starhill Global REIT full year DPU has declined from 5.11 cents to 3.76 cents in 2023.

Portfolio occupancy remains high at 98.7% with long wale of 7.9 years. Gearing ratio is relatively comfortable at 36.8%. However, adjusted interest cover is low at 2.9x which is a red flag in my opinion.

Many investors buy REITs if the properties are located in prime location. Though Starhill Global REIT properties are located in the heart of orchard road, the share price performance speaks a different story.

For the above reasons, Starhill Global REIT is definitely one of the 3 REITs you might wish to skip. You can view the REIT website here.

Conclusion

I have mentioned in this article the 3 REITs you might want to skip. Investors should be aware when investing in REITs, is not only for dividend income but also capital gains over the long term.

In addition, from the 3 REITs shown in this article, it clearly demonstrate the following:

• NAV is never a factor in buying REITs as can be seen from the case of Suntec REIT and Starhill Global REIT
• Prime location of the REIT properties is not a factor too
• Merger and acquisitions does not necessarily benefit shareholders
• DPU is most important factor in determining the REIT share price performance

Investors have this mindset that buying an undervalued REIT with high yield, the share price will eventually recover. However, investors should question themselves the following:

• How sure are  you that the REIT share price will eventually recover?
• If keep for long term, the REIT share price will go up or recover back to the buying price. However, as can be seen from the case of Suntec REIT and Starhill Global REIT, investors would have to wait very long indeed.
• Just buy REITs and collect dividends and do not bother about the share price. However, in the case of Suntec REIT and Starhill Global REIT, the dividends collect cannot even cover the capital loss. In the worst case scenario, REITS may even suspend distributions and this had already happened in a few REITs.