In recent years, 20 cents of every dollar traded daily on the Singapore stock market has been invested in the S-REIT sector. The local and broader REIT sector has also been a cornerstone of the 20 Exchange Traded Funds (ETFs) that have debuted in the Singapore market since 2020.
Recently, the combined assets under management of the five REIT-tracking ETFs hit a new record. The first eight weeks of 2H2024 also saw a 60% increase in the trading volume of these five ETFs compared to 1H2024 and a 200% increase from 2023. The increased allocation and participation in the five REIT ETFs have also coincided with a decline in local six-month T-bill yields in recent months.
Late August also saw the iEdge S-REIT Total Return Index return to early January levels.
While July and August saw some reversal in the iEdge S-REIT Index momentum, institutional investors have only reversed 7% of their 1H2024 net institutional outflow in the S-REIT sector. Frasers Centrepoint Trust J69U , Suntec REIT and ARA US Hospitality have reversed 1H2024 net outflows over the past eight weeks. However, more than 20 trusts in the sector have seen 1H2024 net institutional outflow extend into the first eight weeks of 2H2024.
Cautious optimism continues to be the cliché, albeit prevailing sentiment.
Since the end of June, the likelihood of the US Federal Reserve cutting the Fed Funds Rate on Sept 18 has risen from 65% to 100%, leading to more dovish expectations for the Nov 7 and Dec 18 Federal Open Market Committee (FOMC) meetings. However, speculation of rate cuts does not impact finance costs like an actual rate cut. As noted by Nareit officials during their visit to Singapore in April, a significant portion of global REIT investors in both primary and secondary markets are more focused on the actual implementation of a Fed Funds Rate pivot rather than speculative data and signals leading up to it. And as the Fed chairman Jerome Powell noted at Jackson Hole, subsequent cuts will be data dependent.
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If or when the rate levers, which are crucial levers of business cycles, are activated, the focus inevitably shifts back to growth.
In the US, growth in the REIT sector has shifted some focus away from interest rates since April. Stronger-than-expected earnings growth in the US REIT sector over the past two quarters has resulted in double-digit percentage gains for US REITs. The gains have caused the P/B ratio of the heavily US-weighted FTSE EPRA Nareit Global REITs Index to rise to approximately two standard deviations above its five-year average. In contrast, the iEdge S-REIT Index has a P/B ratio of about one standard deviation below its five-year average.
For Singapore, key growth drivers for S-REITs to watch in 2H2024 include occupancy rates, positive rental reversions, and asset enhancement initiatives. Additionally, maintaining and engaging a diverse tenant base, proactive capital management and the capacity for accretive transactions will create a conducive environment for growth.
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Tighter financial conditions have had a desired overarching impact in cooling inflation and, by extension, containing some growth. For the S-REIT sector, this has resulted in higher borrowing costs and property operating expenses impacting distributable income, with tighter financial conditions also providing for negative currency translations in multiple cases. The consensus expectation is that a rate pivot will change the equation more in favour of growth.
Singapore’s S-REIT sector has 39 trusts listed for trading with well-balanced sub-sectors focused on industrial, retail, hospitality, commercial and specialised property assets in Singapore and across the globe. Three weeks out from Sept 18, retail investors have reversed close to 15% of their net buying in 1H2024 while the average S-REIT is trading at a P/B ratio around 15% lower than its five-year average. Those S-REITs with research coverage are also, on average, trading around 15% below their consensus estimated target price. The S-REIT sector went into 2020 with an average gearing ratio of 35%, which has since increased to 39% and remains well below regulatory limits of up to 50%, which provides flexibility for potential debt headroom to fund capital-intensive acquisitions in pursuit of accretion and growth.
Geoff Howie is Singapore Exchange S68 ’s market strategist, with 25 years of experience in financial markets and macroeconomic analysis.
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