The ASX REIT sector has under performed in recent times with the Vanguard Australian Property ETF V300APROP/ETF (ASX: VAP) which benchmarks against the S&P/ASX 300 A-REIT Index returning just 0.40% over the last year.
With that in mind, value investors might be wondering whether it's time to go bargain hunting. One way of identifying potentially undervalued REITs is to look for the ones that are trading at a discount to their net asset value / book value. Here are three REITs that are doing just that:
| ASX REIT | Current Price to Book ratio | Discount to NAV | Dividend Yield |
| Vicinity Centres Re Ltd (ASX: VCX) | 0.85 | 15% | 6.60% |
| Charter Hall Retail REIT (ASX: CQR) | 0.93 | 7% | 7.30% |
| Investa Office Fund (ASX: IOF) | 0.89 | 11% | 4.70% |
| * All figures according to Morningstar | |||
The pick of the lot there at current prices is Vicinity Centres which has the largest discount to NAV and is trading at a decent 6.6% dividend yield. Accordingly, Goldman Sachs have slapped a buy rating on Vicinity.
Risks
Of course, just because a REIT is trading at below market value doesn't necessarily mean its undervalued. Audited financial statements tend to be more backward looking whilst the market is more concerned about what will happen in the future. In this case it appears the market is factoring in rising interest rates which would have an effect on the relative attractiveness of yields on REITs as well as the potential 'Amazon effect' brought on by the rise of e-commerce. There have also been signs that some tenants in the market have struggled to pay rent as evidenced by Sumo Salad fighting for lower rents from Westfield Corp Ltd (ASX: WFD) last year.
I do think that a lot of these risks have been priced in and if interest rates increase, it will be on the back of wage growth which would be an overall good thing for the economy and retailers.
Better dividend pick?
While I like the REITs above, I prefer this top dividend pick for an income focused portfolio.
