Singapore REITs: Tapering hike momentum signal ‘turn of tide’ for S-REITs
- FED tapering hike momentum signals bottoming out of the S-REITs
- Expectations of a “peak” in 10-year yields to see S-REITS yield spreads widen back to 3.5%; S-REIT prices to see strength in 2H22
- Concerns of an economic slowdown drove increased allocations to industrial and retail S-REITs
- Overall earnings growth expectations intact, organic growth momentum has remained robust in 1H22 results
What’s New
FED “pivot” towards lower hikes to signal the bottoming of the S-REITs. The FED have hiked by 75 bps (as expected) which resulted in a strong rally in the US indices. In addition, guidelines on forward hikes appear to suggest a slowdown in the pace of rate hikes. DBS economists view this “small pivot” by the FED to be a significant guidance, opening the door to a downshift in hikes in 2H2022. As such, DBS economists believe that we are now past the “three peaks” – peak inflation, peak Fed action, and peak Fed rhetoric, which has been an overhang for the S-REITs. This is positive for S-REITs, in our view.
We see a stronger backdrop for the S-REITs in 2H22 as we see the unwinding of themes (such as strong USD, higher rates, risk-off). As such, while the S-REITs have underperformed in the 1H2022 (-3.4% vs the STI 2.3% rise), we sense the “turn of the tide”, especially with the market focusing on possible rate rates in 2023. Our economists are projecting that SG 10-year yields will peak out in 3Q22 at c.3.2% before declining towards 2.65% by end of 2023 on the back of lower inflation and an economic slowdown. At a FY23F yield of 6.1%, this implies that the current yield will expand from an expected 3.3% to 3.5% over time.
Share price performances; where are investors positioned. The S-REITs have held steady in July ’22, up 0.6% but underperformed the +2.2% rise in the Straits Times Index (“STI”). Amongst the various subsectors, the industrial S-REITs (+2.4% for large caps, +1.9% for mid-caps) and Retail S-REITs (+2.1%) given the respective sectors’ perceived resilience against economic slowdown. The Office S-REITs (-1.3%) and Hospitality S-REITs (-1.1%) declined given their closer correlation to economic growth. In terms of stocks, the best performers are Daiwa House Logistics Trust (+7.7%), Mapletree Logistics Trust (+4.1%) and Mapletree Industrial Trust (+3.4%).
Positive feedback from results implies intact growth prospects. With the current interim results season still underway, S-REITs that have reported results showed a strong rebound in earnings for 1H22, on the back of positive organic growth prospects with robust guidelines in 2H22. We saw strong rental reversions seen in the Office space (high single to teens), Industrials (mid-single digit to mid-teens), and retail (flattish to mid-single digits). Hospitality space is seeing a strong RevPAR rebound in 2Q22, with most hoteliers reporting RevPAR upside >50% y-o-y from pent-up leisure demand.