To The Moon

Softer US inflation data that came out the past week fuelled expectations of rate cuts once more. The US consumer price index increased 0.3% from March to April but was lower than what markets were expecting.

This resulted in markets reacting positively to the news which saw Asian equities rally on Thursday (May 16) and Treasury yields decline.

According to the CME Fed Watch tool, traders are also pricing in a 70% probability of a rate cut as early as September.

The iEdge S-Reit Index also rallied on Thursday, gaining 2%. Within the sector, some of the top movers for the day were $Prime US ReitUSD(OXMU.SI)$ , $Mapletree PanAsia Com Tr(N2IU.SI)$ , $Keppel DC Reit(AJBU.SI)$ , $Mapletree Log Tr(M44U.SI)$ , and $CapLand India T(CY6U.SI)$ .

High interest rates impact Reits in a few ways, such as higher financing costs, thereby potentially affecting distributions, as well as lower property valuations. This is perhaps why the sector has declined close to 24% in price since end-2021 (Fed funds rate hikes started in March 2022) up till Q1 2024.

However, investors should remember that Reits invest in income-generating assets and distribute rental income in the form of distributions to Reit unitholders.

Hence, including dividend distributions, this brings S-Reits’ total returns to a fall of 12%, halving their price decline.

In terms of balance sheet strength, the S-Reit sector has an average gearing ratio of 38%, below the regulatory limit of 50%.

With lower leverage ratios and close to three-quarters of S-Reits’ debts entered in fixed rates, Nareit – the worldwide representative voice for Reits and real estate companies with an interest in US real estate – also echoes that disciplined balance sheets will insulate Reits from higher rates.

In the US, the real estate sector has also done well, having seen two stocks beat earnings for every one stock that missed, compared to the broader market’s every three (beat earnings) to two (missed earnings) ratio.

From a valuation perspective, the iEdge S-Reit Index is trading at a price-to-book ratio of 0.85 times, and as highlighted last month, the sector is trading at a discount of almost 20% against its longer-term average.

Retail investors have also been seen to be opportunistic, with over S$760 million in net buy activities in the first four months of this year, compared to S$150 million to S$200 million for the same periods in 2022 and 2023. Inflows to S-Reit ETFs hit a 19-month high in April.

Despite a challenging environment, S-Reits continue to stride ahead thus far. Hospitality S-Reits have recorded on average 20% year-on-year growth in distributions per unit on the back of the tourism recovery.

$KEPPEL REIT(K71U.SI)$ , $Frasers L&C Tr(BUOU.SI)$ , $DigiCore Reit USD(DCRU.SI)$ , $Mapletree Log Tr(M44U.SI)$ , $CapLand India T(CY6U.SI)$ , and $Daiwa Hse Log Tr(DHLU.SI)$ have also announced acquisition plans this year thus far.

The latest $Straits Times Index(STI.SI)$ review also saw F $Frasers Cpt Tr(J69U.SI)$ join the index, bringing the total number of S-Reits in the STI to seven with a combined weightage of 12.5%.

Understandably, markets and investors will still look towards the Fed’s decision on interest rates over the next few months.

Nareit is cautiously optimistic that recovery could begin in 2025; however the rally in global Reits seen last quarter could well signal that the end of the rate-hike cycle will herald a period of Reit outperformance.

https://www.sgx.com/research-education/market-updates/20240520-reit-watch-retail-flows-remain-cautiously-optimistic-s