The Secret Sauce: Why Cheap Equity is the Real MVP for REITs
Ever wonder how some REITs splash out the big bucks while the market is still throwing money at them? Spoiler: it’s all about cheap equity. Think of it as a low‑price sale, but for shares.
How Cheap Equity Pops Up
- Investors get excited about a REIT
- The REIT shows solid upside (growth, high occupancy, killer assets)
- Market sends the price soaring above book value
- Now the REIT can raise funds at a sweet spot—high price, low cost.
Case Study: Mapletree Commercial Trust (MCT)
Play the role of a real‑life superhero example. In October 2019, MCT decided to fire up its high unit price to pull in ~US$900 million for a new property: Mapletree Business City Phase 2.
The Numbers:
- Unit price: $2.24
- Book value per share in Oct 2019: $1.70
- Yield on new units: 4.1 % (smooth ocean tide)
Why is that neat?
- Since the price tops book value, the new equity instantly boosts book value per unit.
- As long as the new property brings >4.1 % yield (or even less if debt gets involved), the shareholders get a per‑unit distribution uptick.
What a Vicious (or pretty much vicious?) Cycle Looks Like
Let’s break it down in picture form:
- Investors love the REIT’s vibe and push its price higher.
- The REIT issues new shares at that sky‑high price.
- Because of the strong sponsor (Mapletree Pte Ltd) and good sentiment, the funds come in cleanly.
- Book value per unit and distribution go up instantly.
- Happy shareholders push the price up again, creating a loop that keeps the REIT growing fast.
What Investors Can Learn
Don’t shy away from REITs with lofty prices. Even if the yield is a bit lower, those high‑priced REITs can sprint ahead faster than their competitors thanks to cheap equity.
But hey, it’s not a magical guarantee. Pick the REITs that know how to pull this off and have a sponsor with deep pockets.
- CapitaLand, Mapletree and Frasers are the big three that’ve hit the sweet spot in Singapore.
- They’ve shown they’re ready to inject capital, even at premium valuations.
So, if you spot a REIT that’s in the pipeline for capital fundraising and has a supportive sponsor, you’re probably in the right track. Ride that reputable REIT’s upward swing and let the virtuous cycle do its thing.
— This material is just for fun and information. No pro finance advice here.
