Singapore REITs: No Surprises from Yellen – maintain Underweight March 16, 2017

  • No surprises from Federal Reserve with first rate hike of 2017. Federal Reserve Chairwoman Janet Yellen sprung little surprise with the 25 basis points rate hike at the March FOMC meeting announcement this morning. Prior to the announcement, markets were already pricing in a 100% certainty of a March hike. We maintain a more hawkish house view (>3 total rate hikes of 25bps each in 2017) than consensus, driven by our belief that the FED is behind the curve in raising rates.
  • REITS underperformed since our downgrade and also YTD. Since our downgrade last month, the FTSE ST REIT Index underperformed the FTSE ST REAL ESTATE Development and Holding Index (flat vs 4.44%). YTD returns show the same trend (3.57% vs 17.28%). We continue to maintain our Underweight rating on S-REITs on the back of unfavourable demand supply dynamics/deteriorating fundamentals during this rate hike cycle.
  • Yield Spreads at close to 7 year average. S-REITS are trading close to the 7 year average (Post GFC) yield spread. We maintain that this is by no means cheap as REITs undoubtedly face the most challenging environment in the last 7 years on the back of normalising interest rates.
  • Adopt a bottoms-up approach as interest rates start to normalise. The loose monetary policies environment since post GFC led to a strong increase in appeal of yield instruments as funds hunted for yield. This “rising tide lifts all boats” situation is set to end with the gradual normalisation of interest rates. Investors ought to adopt a more bottoms-up approach should they opt to remain vested in REITs. We prefer REITs with lower gearing, supported by favourable macro-economic conditions or those with favourable long-term leases. Our ACCUMULATE ratings remain for Croesus Retail Trust, Mapletree Industrial Trust and First REIT.

 

INVESTMENT ACTION

We maintain our UNDERWEIGHT rating on the S-REITs sector. We expect yield spreads to stay close to or above the 7 year average as this period of normalising interest rates amidst an unfavourable demand/supply dynamics could be deemed one of the most challenging periods for S-REITs over the past 7 years.

How do we view this?

  • No surprises from Federal Reserve with first rate hike of 2017. The March rate hike did not come as a surprise as the market has already priced in a 100% probability of a March hike. At the December FOMC meeting, the FED forecasted for 3 rate hikes in 2017 (which was re-iterated this morning). However, we maintain a more hawkish house view (>3 total rate hikes in 2017) than consensus, driven by our belief that the FED is behind the curve in raising rates.

Figure 1: Market expectations for further rate hikes in 2017

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  • REITS underperformed since our downgrade last month and also YTD. Since our downgrade last month, the FTSE ST REIT Index underperformed the FTSE ST REAL ESTATE Development and Holding Index (flat vs 4.44%). YTD returns show the same trend (3.57% vs 17.28%). We continue to maintain our Underweight rating on S-REITs on the back of unfavourable demand supply dynamics/deteriorating fundamentals during a rate hike cycle, as mentioned in our February sector report.

 

  • Yield Spreads at close to 7 year average. S-REITS are trading close to the 7 year average (Post GFC) yield spread. We expect yield spreads to stay close to or above the 7 year average as this period of normalising interest rates amidst an unfavourable demand/supply dynamics could be deemed one of the most challenging periods for S-REITs over the past 7 years.

Figure 2: S-REITs historical yield spread vs Singapore 10 year govt bond yield

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  • Adopt a bottoms-up approach as interest rates start to normalise. The loose monetary policies environment since post GFC led to a strong increase in appeal of yield instruments as funds hunted for yield. This “rising tide lifts all boats” situation is set to end with the gradual normalisation of interest rates. Investors ought to adopt a more bottoms-up approach should they opt to remain vested in REITs.

We favour REITs with lower gearing, supported by favourable macro-economic conditions or those with favourable long leases. Our ACCUMULATE ratings remain for Croesus Retail Trust, Mapletree Industrial Trust and First REIT.

INVESTMENT ACTION

We maintain our UNDERWEIGHT rating on the S-REITs sector. Investors can refer to our February sector report for a more in depth outlook for each individual REIT sector and our thesis for underweighting the sector amidst this rate hike cycle.

Figure 3: REIT Universe and PSR Reit Ratings

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About the author

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Tan Dehong
Investment Analyst
Phillip Securities Research Pte Ltd

Dehong covers primarily the REITs and property developer sector. He has close to 7 years experience in equities related dealing and research roles.

He graduated with a Masters of Science in Applied Finance from SMU and Bachelors of Accountancy from NTU.

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