This research note is the second part of a series on commercial REITs listed in
The charts below give us an idea of how the respective REITs have performed in the stock market.
The main properties under the management of K-REIT are
- Prudential Tower Property;
and GE Tower and Keppel Towers Bugis Junction Towers
Meanwhile the main properties under the management of CapitalCommercial are
Which together account for 82.3% of the gross revenues of the REIT.
The rental rates and other income of REITs thus depend largely on the performance of
A recent Colliers report on the
This analysis by Colliers is corroborated by other property players like CB Richard Ellis, and the optimism expressed in the financial reports by both REITs is not in doubt. Operating conditions are favourable and will be expected to remain so for both CapitaCom and K-REIT
Financial & Profitability Analysis
The table shows some key comparative ratios of the two REITs.
We can see that CapitaCom is much larger that K-REIT, by several times. Both REITs are similarly leveraged at around 27-29% of total assets.
However, in terms of profitability we see that the operating and net margins of CapitaCom are significantly higher than K-REIT by about 6 percentage points for both. This translates into a higher return on shareholders equity, 3.21% to 3.08%.
Cash flow quality is also slightly better for CapitaCom.
An interesting thing to note is that the revenue/assets for these office REITs is significantly lower as a group than the revenue/assets for the retail REITs, which average around 8%.
Valuation & Conclusions
As we can see CapitaCom is trading at a better valuation than K-REIT, it has a lower P/B and higher payout yield based on latest share prices. The profitability analysis reveals that CapitaCom is operating slightly more efficiently than K-REIT.
If I had to choose between the two, I would definitely choose CapitaCom over K-REIT. However both are trading at relatively low yields compared to other trusts like the retail trusts and the shipping trusts. An investor would have to be very optimistic that the expected economic growth is going to result in significant rental increases, in order to justify current valuations in the market.
Note: See also this piece on the healthcare REITs.