It isn’t just the REITs that take their pricing from risk-free rates. Stocks with higher risks require a higher equity risk premium to be attractive to investors. Selected tech stocks, listed fintechs, listed superapps and possibly cryptocurrencies carry higher risk premia. For risky assets such as these, investors need to be compensated by a risk premium, which is a rate of return greater than the risk-free rate. Hence, when risk-free rates rise, these stocks will have to compensate by falling.
Risk-free rates matter when it comes to equities. This is the yield of 10-year Treasuries in the US or the yield on 10-year Singapore Government Securities (SGS) locally. Just ahead of the US Federal Reserve hiking the Federal Funds rate (FFR) by 75 basis points (bps), the yield on 10- year SGS rose to a multi-year high of 3.24% (see chart 1). There has been a small dip since then.
However, with local risk-free rates at 3.24%, the average DPU yields of S-REITs need to rise to an average of 6.8% to 7% to maintain the yield spread of around 360–370 bps. Hence, the S-REIT sector is likely to be under some pressure till the Fed completes its rate hike cycle later this year.
