Fed Pauses Rate Hikes: Time to Buy S-REITs?

June 15, 2023

REITs dividends

The US Federal Reserve (Fed) has paused its interest rate hiking cycle during the June FOMC meeting, after 15 months of interest rate hikes.

This has presented renewed opportunities for investors interested in Singapore Real Estate Investment Trusts (S-REITs).

S-REITs, which own and often operate a portfolio of income-producing real estate assets, are significantly influenced by interest rate movements due to their business model and capital structure.

So, here are some reasons to reevaluate considering whether it’s worth buying S-REITs given we are nearing the peak of the interest rate cycle.

1. Lower or stable borrowing costs

The halting of the Fed’s rate hikes implies borrowing costs will either stay the same or gradually decline.

This can benefit S-REITs, which are known for utilising leverage to fund acquisitions and developments.

Over the previous year, borrowing costs have soared due to the Fed’s aggressive rate increase cycle.

With the Fed’s current pause, this could help balance the borrowing costs, preserving the profitability of S-REITs and potentially leading to higher dividends for investors.

2. Attractive dividend yields

S-REITs often offer more competitive yields versus comparable assets in other countries.

When interest rates are on hold or decreasing, these yields become even more attractive.

On average, S-REITs have an average dividend yield of 8.0%, surpassing the Straits Times Index’s (STI) average dividend yield of 4.7%.

It is also better than the Monetary Authority of Singapore (MAS) 10-year government bond yield of 2.8% and the MAS core inflation rate of 5.0%.

3. Stable cash flows

REITs are required (by law) to distribute a significant proportion of their income as dividends to shareholders, which makes them a good choice for income-focused investors.

Their income is often generated from long-term lease agreements, which can provide a steady and predictable income stream.

This will be important as the global economic recovery remains uncertain and a potential global recession remains on the cards.

4. Potential capital appreciation

S-REITs saw a sharp decline in their share prices in 2022 amid concerns over the impact of higher interest rates.

However, as interest rates near their peak, we could see a return of interest among investors, which could lead to a potential increase in their share prices.

Moreover, despite a slower macroeconomic outlook, Singapore’s property values have remained sturdy, with some increasing over the past year, which could mean additional returns for S-REITs investors.

5. Stability of the Singapore market

Singapore is known for its political stability and strict regulatory environment, which can provide some level of security for investors.

This will play an important role amid the rising geopolitical uncertainty globally.

Opportunities in S-REITs

Given these factors, the Fed’s pause in its rate hike cycle could make this a favorable time to look at S-REITs.

However, it is essential to remember that while interest rates play a significant role, they are just one factor in the complex REIT investment landscape.

The performance of S-REITs also heavily depends on the health of the underlying real estate market, including property demand and rental rates, sector-specific dynamics, and broader economic conditions.

Furthermore, each REIT has its unique characteristics, such as its leverage ratio, quality of assets, and management track record, which should be carefully assessed.

As always, diversification across various sectors and asset classes should remain a cornerstone of any long-term investment strategy.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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