The local market already rallied in anticipation of a rate cut by the US Federal Reserve. At the Federal Market Open Committee meeting on Sept 18, the Fed announced a cut that shaves 50 basis points (bps) off the federal funds rate of 5.25%—5.5%. The 10-year US Treasury yield ended at 3.62% on Sept 18, after falling to a low of 3.59%.
Who benefits? Top of mind is City Developments (CDL), a highly leveraged developer with a low hedge rate. As at June 30, its fixed rate of debt was just 40%, its gearing ratio was 116% and its average debt to maturity was 2.2 years. CDL has gained 9% since early August. What appeared negative during its results briefings for FY2023 and 1HFY2024 is now a tailwind.
What else is likely to sail with CDL? (see our big REIT table here) S-REITs with low fixed rates are Far East Hospitality Trust
The US Federal Reserve’s 50bps rate cut on Sept 18 points to further gains for this sector, says DBS Group Research (DBS), based on price reactions in previous cycles. “We see no reason to turn cautious on the sector, while acknowledging that there could be temporary ‘profit-taking’ in selected S-REITs, whose share prices have done exceedingly well in the past two months and whose yields have compressed to sub-5% levels,” DBS says.
The S-REITs with sub-5% yields are Suntec REIT, CapitaLand Ascott Trust
On the physical property front, CBRE says its data shows average property yields only expanded by about 50bps through the interest rate hike cycle of over 300bps over the past three years. “Although yields could remain tight for selected prime assets, particularly those in high-performing sectors such as retail, industrial and hospitality — they are unlikely to compress significantly even as rates come off,” CBRE says in an update.
See also: Changes in ICR, leverage to come into effect immediately, with additional disclosures in March
However, in anticipation of interest rate cuts in the US and elsewhere, banks in Singapore have already lowered lending rates, CBRE points out. Short-term treasury instruments such as six-month T-bills have seen yields drop 60bps in the space of two months to 3.10% as of Sept 12. Mortgage rates have been lowered to 2.6% (fixed for the first two years) from the peak of 4.0% in early 2023, CBRE adds.
CGS International (CGSI) says anecdotal evidence of stock performance in previous rate cut cycles shows that the Singapore stock market benefited in previous easing cycles in 2007 and 2019.
“We think investors should increase their exposure in S-REITs, which will likely benefit from the continued widening of yield spreads versus the 10-year government bond yield, with potential earnings upside risk in the medium term as funding cost trajectory reverses and inorganic growth opportunities pick up pace,” CGSI says.
See also: IREIT signs 20-year lease contract with UK hotel chain, Premier Inn, in Berlin Campus
Two S-REITs feature among its stock picks: CLAS and Frasers Logistics and Commercial Trust (FLCT). Among the small-cap stocks CGSI recommends for the new interest rate cycle are CSE Global
“In order to ride the momentum of strengthening Asean currencies, we believe that producers such as Japfa and Wilmar, as well as Internet players Sea and Grab, are potential beneficiaries,” CGSI says.
DBS recommends a host of S-REIT beneficiaries. “Tactical opportunities will be names such as Mapletree Pan Asia Commercial Trust
In addition to CLAS, FLCT and MPACT, UOB Kay Hian Research (UOBKH) also recommends Keppel REIT and Mapletree Industrial Trust
On Feb 18, UOBKH reiterated a “buy” call on DC REIT because it has “exercised its option to acquire additional interest in the Frankfurt data centre at an attractive discount of 17.8% to the refreshed valuation and 1HFY2024 NPI [net property income] yield of 5.7%”.
UOBKH’s report adds: “Based on existing market conditions, acquiring 10% of the Frankfurt data centre provides DPU [distribution per unit] accretion of 1.7%. If market conditions improve, acquiring a 40% stake enhances DPU accretion to 7.0%.”
In all the euphoria, Homin Lee, senior macro strategist at Lombard Odier, cautions that the US election could be a real dampener. “The upcoming US election is still a major risk for both the US Fed and Asia’s central banks, and Trump’s potential return to the White House is likely to bring easing in Asia and the US to a halt in mid-2025.”
