SINGAPORE (Mar 20): Real estate investment trusts, especially US REITs listed on SGX, may be in for further volatility. The huge stimulus that the US administration is proposing will have to be funded by debt and that could drive up US risk-free rates regardless of the level of the federal funds rate, which is at zero. This could cause a double whammy for the US REITs as the pressure on US capitalisation rates could be upwards at a time when the US economy is slipping into recession.
If that was not enough of a headache, on March 17 the US Federal Reserve announced that the US commercial paper market has been under considerable strain as businesses and households face greater uncertainty in light of the coronavirus outbreak. Hence, the Fed also announced a US$700 billion ($1.02 trillion) quantitative easing programme, and Commercial Paper Funding Facility (CPFF). Chart 1 shows the performance of US REITs versus Chinese retail REITs.
Chinese retail REITs should have been under pressure on a couple of counts. Their malls were closed or had to operate on shorter working hours for January and February. The constant drum of ecommerce is viewed as a perennial threat. Yet Chinese retail REITs have outperformed US REITs excluding distributions. This is despite US REITs’ properties being generally freehold.
The main reason appears to be China going back to work and the malls in the retail REITs ramping up business. On the other hand, as the US slips into recession, the net property income for US REITs is likely to be negatively impacted.
Chart 2 shows the debt to asset ratios which are REITs’ gearing ratios. None of the REITs with the lowest gearing ratios are US REITs. Furthermore, asset prices have not fallen. When they do, REITs gearing levels would likely rise.
Of course the market is punishing not just the US REITs. S-REITs have fallen in general. The FTSE Straits Times REIT Index has outperformed the STI by falling marginally less, although the former has fallen more since the Fed started lowering interest rates, so it feels like a sharper drop.
S-REITs are falling because investors have come to the realisation that 1) the US cred-it market needs more liquidity than is currently present; 2) local private banks’ high net worth money could be unwinding; and 3) fund redemption continues, especially for members of the FTSE EPRA NAREIT Developed Index ETF.
Indeed, all the REITs have fallen because of the first two points. In addition, the much desired entry into the FTSE EPRA NAREIT Developed Index is a double-edged sword. In 2019, Frasers Centrepoint Trust, Frasers Logistics and Industrial Trust, Keppel DC REIT and Manulife US REIT were new entrants. Of these, Keppel DC REIT is probably the most resilient. With the exception of Keppel DC REIT, the others have fallen by between 25% and 42% this year.
