Online brokerage IG says the S-REIT sector may be finally seeing a turnaround. Yeap Jun Rong, market strategist at IG says property counters and S-REITs are seeing broad gains on Aug 26 thanks to the “dovish tone” from US Federal Reserve Chair Jerome Powell’s Aug 23 speech at Jackson Hole.
As at 2.30pm, nearly all S-REITs are trading higher, with the US office S-REITs leading the gains. Manulife US REIT BTOU , Keppel Pacific Oak US REIT CMOU and Prime US REIT OXMU are up between 9.6% and 12.50%. They are followed by Lendlease Global Commercial REIT JYEU , Mapletree Pan Asia Commercial Trust N2IU and CapitaLand China Trust AU8U , which are up between 3.7% and 4.39%.
“In the lead-up to the economic symposium, markets have already been fully priced for at least a 25 basis point (bp) rate cut in September, but getting the confirmation from the horse’s mouth offered a renewed sense of reassurance for markets,” writes Yeap in an Aug 26 note.
“From the symposium, the balance of risks for the Fed has clearly shifted away from inflation towards growth. The Fed will now be headed for rescue mode, with a strong message that they ‘do not seek or welcome further cooling in labour market conditions’.”
What’s next?
With a policy pivot now on the horizon, the key question will be how much and how quickly the Fed will ease, says Yeap. “To be aligned with the Fed will leave data-dependency as the answer for now, with a series of inflation data and all-important US non-farm payroll early next month on watch to guide the debate.”
See also: Powell says 'time has come' for Fed to cut interest rates
Fed rate expectations are now rooting for a 25bps cut in September with a 62% probability, while 38% odds are priced for a larger 50bps move.
According to Yeap, the markets continue to expect back-to-back cuts through March 2025. “If further validated by softer economic data, implications could be further downside risks to bond yields, which may generally make S-REITs more attractive for investors.”
Turnaround on the horizon?
See also: Powell’s pivot leaves traders debating size, path of rate cuts
The iEdge S-REIT index has gained as much as 6.8% over the past two weeks, but despite this, it continues to trail the broader Straits Times Index (STI) by a “significant” margin, says Yeap.
Over the past five years, the broader index returns 9.0%, while the S-REIT sector is still hovering around Covid-19 levels with a 24.4% dip in the red.
That said, the lagging performance may potentially offer room for some catch-up in the sector, according to Yeap, especially as the sector’s yield spread with Singapore’s 10-year government bond yields remained below its 10-year historical average.
Valuation from a price-to-book perspective remains attractive as well, with the FTSE ST REIT index price-to-book ratio likewise trading more than one standard deviation below its 10-year historical average, he adds.
Within the STI
The dividend yield for STI S-REIT constituents currently stands between 5.1% and 6.7%, which is similar to what the local banks are offering: DBS Group Holdings D05 at 5.6%, Oversea-Chinese Banking Corporation (OCBC) O39 with 6.0% and United Overseas Bank U11 (UOB) with 5.6%.
For more stories about where money flows, click here for Capital Section
“That may explain the outperformance in the banking sector over the past years, which offer an attractive mix of income (dividends) and growth (businesses’ acquisitions),” Yeap notes.
But as banks’ earnings are likely to see a peak with upcoming rate cuts, whether more traction will shift towards the REIT sector will be a theme to watch ahead, says Yeap. “This is given the view that rate cuts generally translate to lower borrowing costs, which may be positive for REITs’ profitability given their businesses’ reliance on debt, while their property valuation may also be well-supported with lower rates.”
Technically speaking
The iEdge S-REIT Index has registered a new six-month high in today’s session, as buyers take greater control with the formation of a new higher high, says Yeap. “Positive momentum has been building as its daily relative strength index (RSI) defended the midline back in early-August this year, while daily moving average convergence/divergence headed higher into positive territory.”
A move above an immediate downward trendline resistance may be on watch, with any success in overcoming the near-term resistance potentially paving the way for the index to retest its year-to-date high, according to Yeap.
The Lion-Phillip S-REIT ETF is seeking a new high since February.
Charts: IG
