Singapore REITs: Preference for high yields as Fed reiterates hawkish stance
- S-REIT sector declined 4.6`% m-o-m in August
- Futures pricing in market expectations for interest rates to reach 3.75%-4.00% by 1Q23, as Fed reiterates its hawkish stance at Jackson Hole
- Sector rotation towards higher yielding plays and inflation-hedged REITs in a sell-off month
Market expects interest rates to reach 3.75%-4.00% by next March. The Singapore REITs Index (FSTREI) declined 4.6% m-o-m in August, underperforming the Straits Times Index (STI), which rose 0.3% m-o-m. The weakness in prices largely came aftger Fed Chairman Jerome Powell reiterated his hawkish stance during the annual central bank symposium at Jackson Hole towards the end of the month, with the commitment to reduce inflation rates back to below 2%. The latest US inflation rate of 8.5% in July was a slight improvement from June’s 9.1%, but hovers near a 40-year high.
Contributors of inflation, including heightened energy costs, labour shortages, and the supply side crunch, continue to persist, but have seen a slight moderation in the most recent months. Correspondingly, interest rate futures are pricing in the market expectation that policy rates would reach the 3.75%-4.00% range by next March and also the third 75bps hike in the September policy meeting.
Preference towards higher yielding plays and inflation-hedged REITs. Winning sectors for the quarter included the hospitality sector, which rose 0.2% m-o-m, followed by the European office sector (-1.8% m-o-m) and US hospitality sector (-2.1% m-o-m). On a more hawkish interest rate forecast, sell-offs were felt across all sectors, but we note that sectorial preference sees (i) a rotation towards higher yielding sectors (European office/US hospitality) as opposed to lower yielding large-cap plays; and (ii) a rotation towards sectors with inflation hedges in place with rents tagged to consumer price indices (CPIs) (European office) or dynamic room pricing (US hospitality).
Top performers for the month include Cromwell European REIT (+3.0% m-o-m), EC World REIT (+2.8% m-o-m), and Sabana REIT (+1.1% m-o-m). The majority of Cromwell European REIT’s leases are on annual escalations tagged to the CPI, and the REIT offers a compelling forward yield of 8%. EC World REIT and Sabana REIT also feature strongly among the highest yielding industrial stocks. EC World REIT delivers a compelling double-digit 12%-13% forward FY22/23 dividend yield, while Sabana REIT delivers a forward yield for FY22/23 of 7.6%-7.8%.