By Kimberley Kao
Real-estate investment trusts broadly rose in Singapore after the Federal Reserve began its easing cycle, buoyed by sentiment that lower interest rates will ease borrowing costs and support earnings.
The units of Singapore-listed companies climbed Thursday after the Fed cut interest rates for the first time since 2020, particularly those operating commercial and office properties in the U.S. Manulife US REIT was 7.3% higher by the midday break, while Keppel Pacific Oak US REIT and Digital Core REIT climbed 3.8% and 3.3%, respectively.
"The transmission of low U.S. rates to Singapore is faster than many other Asian countries due to the high interest rate correlation," said Paul Chew, head of research at Phillip Securities Research.
The advance came after Fed officials on Wednesday announced a half-percentage-point reduction in interest rates. A rate cut was widely expected, but markets were left guessing about the size of the move. Many analysts had expected a smaller cut of a quarter percentage point.
Analysts say the large rate cut will help alleviate some debt burden on the REIT sector by lowering borrowing costs. Should more rate cuts transpire in the next six months, they could spur a rally in a sector that has been largely flat this year.
The Fed's outsize cut should help the "debt-sensitive REIT sector" and enhance the attractiveness of their dividend, said Yeap Jun Rong, market strategist at IG.
"We think there is room for a strong rally" in Singapore REITs if more rate cuts occur over the next six months as expected, said Phillip Securities Research's Chew. REITs would enjoy "an attractive yield compared to bonds, lower interest expenses and higher property valuations" as rates ease, he said.
The subdued U.S. commercial real-estate market has remained under pressure due to high interest rates, and many Singapore REITs with U.S. exposure saw property valuations drop significantly due to lower occupancy levels.
RHB Research analyst Vijay Natarajan said that the sizable rate cut could spark worries about a weaker economic outlook, which may lead to downside risks for the sector should they persist. Still, given the Fed's comments that the 0.5-percentage-point cut was a pre-emptive move and not the norm going forward, markets will likely be more confident of a "soft landing path," setting a positive trajectory for the sector, Natarajan said.
Meanwhile, some Singapore REITs whose unit prices have performed significantly well over the past two months could witness "temporary profit-taking," DBS Group Research wrote in a note.
Investors looking for cues on the path of normalization are currently focusing more on the Fed's language regarding the rate cut rather than the actual cut itself, DBS said.
Write to Kimberley Kao at kimberley.kao@wsj.com
(END) Dow Jones Newswires
September 19, 2024 00:51 ET (04:51 GMT)
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