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Price More Than Book Value- a Value Stock?


japanrainbowbridge Recently, someone pointed out that the book value of some of the Real Estate Investment Trusts (REITs) were less than the price that it was trading at during an investment talk. So is that really a value stock?

The answer is, ‘yes it is’. But with the valuations of properties being pushed up, it is dangerous to assume that just because of that, one should put a lot of your money into the REIT counters.

If there is a property bubble in Singapore right now, the valuations of the assets in the REITs will be correspondingly overvalued.

So this is one of the case of having to look further to see if the REIT is worth buying. I’d look further at how leveraged it is in terms of borrowings since once interest rates goes up and property prices goes south like it did in United States, the valuation and interest cost is going to affect the financial position of the REIT.

Remember that the REIT isn’t a magic pill and can go down pretty quickly if market conditions deteriorate further. The one thing in its favour is that for most of the REITs, the rental income is pretty much fixed for a period so returns can be estimated fairly accurately. And the dividends it pays out makes it what people call a defensive stock.

So do you think your investment portfolio needs to go on the defensive?

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