As unit prices among the Singapore REIT (S-REIT) sector climbed some 7% in November and outperforming the benchmark Straits Times Index’s (STI) gain of 1%, DBS Group Research analysts Geraldine Wong, Derek Tan, Rachel Tan and Dale Lai still see that it is an opportune time for investors to add S-REITs as concerns of further interest rate hikes continue to abate.
The climb in S-REITs in November came in response to the more dovish sentiment on the street as the US Federal Reserve paused rate hikes in the early part of the month.
“The US 2-year and US 10- year yields have declined by 40 basis points (bps) and 50 bps month-on-month to 4.6% and 4.3% respectively with market now looking at a potential interest rate pivot by the Fed,” the analysts write.
The surge in the REITs’ unit prices were also across the sector with US office REITs (25% higher m-o-m) leading the gains on expectations of a sponsor-led deal for Manulife US REIT (MUST). This was followed by data-centre S-REITs (12% higher), European focused S-REITs (11% up m-o-m), retail S-REITs (9% up) and industrial S-REITs (8% higher m-o-m).
That said, a further pause in rate hikes in December will provide another boost with investors recommended to “sniff” for hints of a normalisation trend, say the analysts.
“We believe that investor sentiment will likely be further boosted on the back of the Federal Open Market Committee (FOMC) meeting in mid-December. Markets have broadly priced in a further ‘pause’ with investors getting further guidance on [the] Fed’s normalisation path,” they write.
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The team of economists at DBS expect the Fed to initiate rate cuts in 2H2024 with a 100 bps cut baked into the analysts’ estimates, they add.
“We had previously highlighted that investors would be well rewarded by positioning in the S-REITs, taking the cue from the outperformance of up to 2x above the benchmark (+20% for S-REITs over a period of six months vs +8% for the STI) during the last Fed pause back in 2018-1H2019,” they say.
Furthermore, the analysts’ recent investor meetings on S-REITs are also seeing an increasing consensus view that the “worst is over” for S-REITs.
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“Investors are increasingly looking to add but are most comforted with the visibility and stability in the retail and industrial subsectors for now,” say the analysts.
“While S-REIT share prices have risen, overall valuations are still attractive at forward distribution per unit (DPU) yields of [around] 6.7%-6.8% and P/B of 0.85x,” they add.
On the back of the analysts’ trip to Bangkok with S-REITs in late November, they see that most of the S-REITs have resilient cashflows bolstered by a decent organic growth outlook such as positive rental reversions, improved contributions post asset enhancement initiatives.
“Indications of potential portfolio stability will be a positive catalyst for stocks to see improved performance, in our view,” say the analysts.
