As tapering approaches and the US Federal Reserve rolls back its bond buying programme, US dollar liquidity is impacted. This in turn drives up yields, including yields on the 10-year US treasuries. In Singapore, yields on 10-year Singapore Government Securities, although still low, have started to creep up to 1.7% as at Oct 13 compared with 0.9% a year ago.
REITs take their pricing off risk-free rates, which are usually yields on 10- year bonds. Hence, if these yields start to rise, the yields of REITs are likely to expand too. Everything remaining constant, unit prices are likely to fall to maintain the yield spread.
Additionally, higher risk-free rates could lead to higher discount rates in the event of valuing an asset based on discounted cash flow (DCF). Higher discount rates usually cause capital values to fall if there are no changes in cash flow assumptions.
However, if higher interest rates are caused by inflation, that could benefit REITs. Usually during inflationary periods, commercial rents and asset values rise. Hence inflation is often positive for certain REIT sectors. In fact, inflation is generally good for asset prices in general, including equities and property. Market watchers need to keep a lookout for stagflation, which has not appeared since the 1970s.
Chinese S-REITs have been under selling pressure since the beginning of 3Q2021 starting July 1. Both Sasseur REIT and CapitaLand China Trust (CLCT) have fallen by around 11% although CLCT has staged a sharp rebound.
The reason could be twofold. Bloomberg reports that Chinese producer prices (for September) are at a 26-year high. Reports coming out of China indicate that power prices are rising and there may even be a shortage in China’s rust belt.
In addition to economic challenges, the Chinese S-REITs also face a perception problem. Bloomberg reports Chinese property developers are responsible for about half of the world’s distressed dollar bonds. “Of the US$139 billion [$187.5 billion] of dollar-denominated bonds trading at distressed prices, 46% were issued by companies in China’s real estate sector, according to data compiled by Bloomberg on Oct 12,” the report says.
Distressed prices may not mean default, but the Chinese press reported that there have already been 39 defaults by Chinese developers this year. More negatively for China-based real estate entities is the pricing in the bond market. Reports are emerging that the bond market is almost closed to high yield Chinese developers for new issuances, and indices tracking Chinese developers’ bonds are trading in their teens, at 12%–14%.
Despite these challenges, fundamentally, CLCT’s net property income and DPU could outrun inflationary pressures and rising risk free rates as it has diversified and stabilised its portfolio. Sasseur REIT’s fundamental challenges remain as inflation could cause a dent in discretionary spending in its outlet malls.
Technically though, Sasseur REIT’s unit prices have formed positive divergences with its smoothed RSI which is starting to trigger a rebound. At present, this looks like a rebound in a downtrend, with resistance appearing at 88 cents.
Similarly, CLCT’s unit price has been forming positive divergences with its smoothed RSI. In addition, climactic selling took place on Oct 13, with the stock forming a white candle on very high volume. This suggests that the decline has — at least for the next several weeks — been stopped. The rebound off the low could be as high as $1.33 to $1.36 initially, after which prices could move sideways in an effort to form a base or consolidation range.
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