“The US 2-year and US 10- year yields have declined by 40 basis points (bps) and 50 bps month-on-month to 4.6% and 4.3% respectively with market now looking at a potential interest rate pivot by the Fed,” the analysts write.
The surge in the REITs’ unit prices were also across the sector with US office REITs (25% higher m-o-m) leading the gains on expectations of a sponsor-led deal for Manulife US REIT (MUST). This was followed by data-centre S-REITs (12% higher), European focused S-REITs (11% up m-o-m), retail S-REITs (9% up) and industrial S-REITs (8% higher m-o-m).
That said, a further pause in rate hikes in December will provide another boost with investors recommended to “sniff” for hints of a normalisation trend, say the analysts.
“We believe that investor sentiment will likely be further boosted on the back of the Federal Open Market Committee (FOMC) meeting in mid-December. Markets have broadly priced in a further ‘pause’ with investors getting further guidance on [the] Fed’s normalisation path,” they write.
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The team of economists at DBS expect the Fed to initiate rate cuts in 2H2024 with a 100 bps cut baked into the analysts’ estimates, they add.
“We had previously highlighted that investors would be well rewarded by positioning in the S-REITs, taking the cue from the outperformance of up to 2x above the benchmark (+20% for S-REITs over a period of six months vs +8% for the STI) during the last Fed pause back in 2018-1H2019,” they say.
Furthermore, the analysts’ recent investor meetings on S-REITs are also seeing an increasing consensus view that the “worst is over” for S-REITs.
“Investors are increasingly looking to add but are most comforted with the visibility and stability in the retail and industrial subsectors for now,” say the analysts.
“While S-REIT share prices have risen, overall valuations are still attractive at forward distribution per unit (DPU) yields of [around] 6.7%-6.8% and P/B of 0.85x,” they add.
On the back of the analysts’ trip to Bangkok with S-REITs in late November, they see that most of the S-REITs have resilient cashflows bolstered by a decent organic growth outlook such as positive rental reversions, improved contributions post asset enhancement initiatives.
“Indications of potential portfolio stability will be a positive catalyst for stocks to see improved performance, in our view,” say the analysts.
