Increasingly, the Singapore market is viewed as one which gives attractive yields. Hence, total shareholder returns including dividends need to be considered when comparing the Singapore market with other markets.
While the broader Singapore market has lagged the S&P 500, Singapore banks’ total shareholders’ returns, which includes dividends, are up 25%. Although the FTSE Financial Index is nudging the upper end of its price-to-book range, dividend yields are decent at around 5.8%, Lee says.
The sectors that suffered during the Federal Reserve’s rate hike cycle include the local real estate sector and S-REITs, as represented by the FTSE Real Estate Index and the FTSE REIT Index.
Lee reckons that S-REITs are likely to benefit when the Fed starts its easing cycle. The benefits are unlikely to be on the distributions per unit (DPU) front as many S-REITs are still refinancing debt at higher costs as the cheap Covid debt runs off.
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Nonetheless, lower policy rates are likely to cause risk-free rates to ebb which could cause cost of capital to fall. Since S-REITs unit prices are valued based on the yield spread between their DPU yields and the risk-free rates, DPU yields could compress as unit prices recover.
For Singapore-focused S-REITs, Lee points out that occupancy rates are still healthy based on results and business updates for the Jan-March quarter. Rental reversions showed a 3-5% growth, she adds, However, the upward revision in the cost of debt also persisted.
“Leverage ratios for most S-REITs are below 40%, and prices have priced in negatives. Our preference is for the bigger S-REITs. If a tenant defaults in a larger portfolio, the impact is less,” Lee says.
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Separately, DBS Group Research notes that the funding environment in the US appears to be thawing, as evidenced by the ability of both Prime US REITand Keppel Pacific Oak US REIT (KORE) to refinance debt.
Prime REIT announced it is in the final stages of loan documentation with their onshore banks and expects to complete sometime in Aug. KORE has announced that it has secured the refinancing of US$115 million expiring this year, for a further 12 months.
“Our view is that the sector is not totally “out of the woods”. [But], valuations at 0.2x P/B could prompt near-term tactical investors to take a near-term position,” DBS says.
The ability to obtain refinancing and the risk of a “funding gap” were key reasons for the overhang and significant drop-off in share prices for the US office S-REITs in 2023.
“With the immediate refinancing hurdle now removed, we believe that there will be a relief rally on US office S-REITs (KORE, Prime and Manulife US REIT) could continue in the immediate term. While we do not foresee the US Office S-REITs to be out of the woods given expectations of still weak asset values by end 2024, valuations could prove to be a catalyst as they are still trading at c.0.2x P/B,” DBS says.
The global economic outlook is fraught with uncertainties. When Lee gave her presentation, Donald Trump had been shot at, and the media reported that glass from the teleprompter had grazed his ear. This caused opinion polls to move in his favour.
When Trump was president from Jan 20, 2017 to Jan 20, 2021, he implemented tariffs on China. This time round, he has said he will impose tariffs of 60% on Chinese goods. “Depending on the levy, Chinese growth could fall by 1-2%,” Lee says. In addition, during his first term, Trump had insisted that Chinese ADRs in the US had to comply with a certain set of requirements or delist. But he lost the 2020 election.
“If he comes back in, what will happen to ADRs?” Lee wonders. “It will be negative for China, but the rest of the world will not be spared. Measures could be targeted at foreign companies, and there will be volatility.”
