Opportunity to Invest in S-REITs as US Fed Pause Rate Hikes

December 12, 2023

2023 has been a roller-coaster year for Singapore’s Real Estate Investment Trusts (S-REITs).

Initially hampered by rising interest rates, these trusts have recently rebounded thanks to the US Federal Reserve’s pause in rate hikes.

With this recent development, we take a look at the current landscape and potential investment opportunities in S-REITs.

Is the recovery marks the shift towards REITs?

The rebound in S-REITs is primarily attributed to market optimism about the Federal Reserve’s likely halt in rate hikes.

This optimism, coupled with the 10-year Singapore bond yield retracting to 2.95%, has created a favourable environment for S-REIT investments.

The sector currently offers an appealing average dividend yield of 8.2%, backed by a price-to-book value (P/BV) ratio of 0.67 times as of November 2023.

Resilient operations despite rising interest rate and inflationary pressure

S-REITs have demonstrated remarkable operational resilience.

Positive rental reversions and high occupancy rates have fueled top-line growth.

However, higher interest costs and strategic cash conservation measures have pressured distribution income.

The sector’s gearing stands at approximately 39%, indicating that a downward pivot in interest rates could significantly benefit S-REITs by reducing funding costs.

In terms of sub-sectors of S-REITs, here is a look at how the industrial, retail, hospitality and office REITs have performed.

  • Industrial Sector: Strong demand from high-tech industries, with expectations of continued moderate rent increases.
  • Retail Sector: Positive rental reversions and high occupancy, with a robust outlook for FY24F.
  • Hospitality Sector: Resilience shown through DPU growth and a positive outlook driven by Singapore’s strong MICE and tourism sector.
  • Office Sector: Substantial rent increases with expected modest growth in 2024, despite an influx of new supply.

Top picks: CapitaLand Ascendas REIT and CapitaLand Ascott Trust

CapitaLand Ascendas REIT (SGX: A17U) and CapitaLand Ascott Trust (SGX: HMN) are among our top picks for S-REITs.

CapitaLand Ascendas REIT’s diversified portfolio and strong balance sheet, along with a high natural hedge, make it a promising choice.

Meanwhile, CapitaLand Ascott Trust offers stability and exposure to the recovering hospitality sector.

Attractive investment opportunity with its appealing yield

S-REITs present an attractive investment opportunity, offering a blend of resilient performance, appealing yields, and potential capital appreciation.

However, investors should be aware of potential risks such as unexpected interest rate hikes and persistent high inflation, which could increase funding costs and limit growth.

It is important to conduct thorough research and consider their risk profiles before investing in S-REITs.

Disclaimer: ProsperUs Head of Content & Investment Lead 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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