The US Federal Reserve has articulated its stance of tapering its bond purchases next year. This is likely to result in a rise in the 10- year bond yield in the US, which is viewed as the risk free rate.
A taper is also likely to drive up the US dollar as its liquidity fades. When that materialises, local interbank rates could firm, which in turn would cause yields on the 10-year Singapore Government Securities (SGS) to firm.
The 10-year SGS yield is the local risk-free rate. REITs are priced off risk-free rates, through a yield spread. When risk-free rates rise, REIT yields tend to rise as well, causing REIT unit prices to fall. That, in a nutshell, is what happens to REITs during a taper tantrum.
In a perfect world, REITs that have run-up in price could be vulnerable to yield expansion. ARA LOGOS Logistics Trust (ALOG) has risen by more than 50% since the start of the year. For several years, when ALOG was Cache Logistics Trust, it did not have a proper sponsor. Once LOGOS became the sponsor and supported ALOG with a pipeline and equity raising, the unit price took off after years in the doldrums, demonstrating how important a supportive sponsor is.
ParkwayLife REIT has the lowest yield amongst the REITs. Its unit price is up more than 20% this year. Its unitholders have voted in favour of the new master lease which would both boost its distributions per unit and net asset value. In addition, ParkwayLife REIT has clinched a right of first refusal for Mount Elizabeth Novena. At a yield of below 3%, indicating a very low cost of capital, it should be able to acquire Mount Elizabeth Novena, given that the latter’s capitalisation rate is likely to be 4.5% as indicated by IHH Healthcare’s annual report.
In general, the top losers this year are not a surprise with the exception of Keppel DC REIT. This could be because it was one of the top performers last year, and also because investors may not be comfortable with its Guangdong province acquisition.
