- S-REITs had a torrid Jan 22, down 6.6%, underperforming the STI despite improving fundamentals
- Industrial and healthcare S-REITs were relative underperformers due to “rotational trade” and lowest spread vs. 10-year bonds
- Almost half of 44 S-REITs are trading close to 52-week lows, highlighting attractive re-entry points
- Yield spreads widened to 4.3%, close to -1 standard deviation
What’s New
Subsector trends in December
Broad weakness in Jan 22. It was a tough month for the S-REITs in Jan 22, with the FSTREI dipping by 6.6 while the STI remains on a firm upward trajectory of c.4.0%. The weakness largely came from rising expectations in the market of Fed rate hikes in 2022 with the consensus now expecting in the range of four to five hikes through the course of the year. The Fed meeting in late Jan 22 doesn’t provide comfort when the market reads the hawkish tone with caution, with the first rate hike expected to happen in Mar 22.
During the month, most sectors dipped between -3.0% to -8.0%. The biggest dip came from the industrial S-REITs (-8.0% m-o-m) and healthcare (-6.6% m-o-m), which we believe is due to their lower absolute yields ranging from 4.0% to 4.5%, compared to the overall sector yield of 6.0%. This was due to outflows from the sector coupled with rotational interests as the “re-opening” theme remains firmly in play. The retail-focused S-REITs and office-focused S-REITs dipped by a lower 5.0% and 3.0%, respectively, while hospitality S-REITs dipped by 3.7% and US hospitality names dipped by 3.0%.
Our observations
S-REITs bottoming out ahead of rate hikes. In view of the impending rate lift-off in Mar 22, we believe that we are nearing the near-term bottom for S-REITs, with the sector also having hit the bottom in prices back in Mar 16 after rates were last raised. We are, therefore, not sellers at these levels but are looking for an opportunity to accumulate upon the weakness.
Positive read in results. The weakness in share prices highlights the fact that outflows owing to tactical repositioning within and out of the S-REITs remain in play, given the risk of rising interest rates on yield-sensitive stocks like S-REITs. This was despite the positive read from the results posted in the week of 24 Jan 2022, when most S-REITs reported strong growth in DPUs on top of providing positive guidance on the 2022 outlook, with most managers expecting to see an improvement in trading conditions coupled with a firmer rental reversions outlook. While macro uncertainty stemming from the uncertainty in rate hikes may cloud the overall outlook for now, the positive guidance provides us with confidence that our forward projections of an 8.0% CAGR in DPU growth remains intact.
Almost half of the S-REITs are close to 52-week low; opportunity to pick up “value buys”. The S-REITs are close to its 52-week low, with 19 out of 44 S-REITs trading within 5% of their 52-week low prices. Seven out of the top 15 market cap S-REITs are within 5% of its 52-week lows. We see value at current levels, with FY22F yields expanding to 6.1%, implying a spread of 4.3% (10-year yields at 1.8% as of 3 Feb 22). Even if we assume 10-year yields rise to c.2.0% in the longer term, we are still looking at a yield spread of 4.1% (above the historical mean).