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Should you buy these 3 REITs trading at a discount to book value?

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.

These 3 stocks could be the next big movers in 2020

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In this FREE STOCK REPORT, Scott just revealed what he believes are the 3 ASX stocks for the post COVID world that investors should buy right now while they still can. These stocks are trading at dirt-cheap prices and Scott thinks these could really go gangbusters as we move into ‘the new normal’.

*Returns as of 6/8/2020

Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can follow Kevin on Twitter @KevinGandiya.

The Motley Fool Australia has recommended Westfield. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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