Many investment bloggers have touched on this topic given that the Singapore REITs have fallen by almost 30% from their mid-2021 peak. Is it a buy now? Given the recent Fed guidance of a potential pivot to lower interest rates.
Frankly, the Fed has been flip-flopping but the all-important inflation numbers are at an almost ideal level of around 3%. It is still short of the 2% target but things seem to be under control.
REITs have been the bellwether for lots of retail investors given the perception of it being a safer instrument than true blue stocks. The attraction is that mandatorily, they have to pay out 90% of their income to shareholders as dividends.
Moreover, given that they are tangibly backed by shopping malls, industrial and commercial buildings, it added the assurance that their investment is not riding on some fads and whatnot.
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SREITs Current Climate
They were doing well during the low interest rate environment which lasted since 2008 (Great Financial Crisis) and were stable in price fluctuations. The recent price drop would not be something that investors are used to. It is back to their Covid 19 lows or for some REITs, they set record lows.
With the Covid situation, it is understandable why REIT prices plunged as everyone is in locked-down mode, which will affect the rental situation in shopping malls and office buildings.
Source: Yahoo Finance
This time around, it is due to the rapid escalation of interest rates. In April 2022, the Fed rate was still hovering close to zero per cent and is now at the 5.5% rate. With the potential pivot hinted at by the Federal Reserve in November 2023, it saw a renewed interest in REITs- the REITs index appreciated 15%. Prices have since retraced close to their all-time low due to the market perception of the credibility of the pivot.
Is the Fed Going to Pivot?
So when will the Fed finally start to reduce the interest rate?
This will be the move that investors in REITs are looking forward to. It will be a good catalyst for an upward surge in prices.
At least of now, with inflation under control, the base case is the direction in which the Fed Interest Rate will be going down compared to continuing their ascent. Market expectations are for a 50 to 75 basis point (0.5%-0.75%) fall from the current rate of 5.5% by the end of 2024.
If there is a cut in interest rate, it would likely materialise in the 2nd to 3rd quarter of 2024.
Are SReits Attractively Priced Now?
Looking at 2 metrics:
Source: SGX
Price to Book
They are trading on average at 0.8 price to book. This looks like a good value if there are no further impairments to the asset values.
Yield Spread between Reits and 10-year Treasury
The yield spread is currently at 4%. This is higher than the historical average spread of 3.5%. If everything stays constant, Sreits are undervalued now.
Risks Going Forward
Interest Rate starts to Increase
We have set our base case of a drop in interest rates but if the alternative happens, it will be bad news for REITs, which are negatively affected by higher interest rates.
We will be concerned if inflation rates start moving above 5%.
Another Financial Crisis
This might be neutral for REITs as they are already trading at below book value. If there is indeed another financial crisis, a drastic drop in interest rates will be expected that will swing in the favour of REITs.
Moreover, they have survived relatively well given a pandemic locked down, it should be able to weather another financial crisis given the current margin of safety (below book and yield spread) that they offer.
Summing Up
Evaluating the current climate of Sreits, we are cautiously bullish due to the valuation and likely Fed pivot to lower interest rates.
The average yield of around 7% seems attractive based on the yield spread with the 10-year Treasury. Moreover, it is trading at an average of 0.8X price to book.
However, we would be sceptical of a huge surge given interest rates are unlikely to go back to below 2% level in the next year or so.
We will advise you to stick to REITs with strong sponsors such as the likes of Mapletree, CapitaLand and Frasers.
Also Read:Â Retire in Style for Singaporeans in Malaysia- Johor Bahru
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The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.
