Technically, the 10-year US Treasury yield has fallen below the 4.20%–4.22% range, ending at 4.16% on July 17. The 10-year yield on Singapore Government Securities (SGS) fell below 3% on July 17 to end at 2.97% for the first time since February. On average, the SGS 10-year yield remained above 3% this year.
The relationship between the FTSE REIT Index and the 10-year Treasury and SGS yields (often viewed as risk-free rates) has been inversely proportional for the past three years. As yields rose, the REIT Index fell. Whether the S-REIT index rises as yields fall remains to be seen, but the probability is high.
After hitting a low of 614 in October last year, the REIT Index has been moving in a wide range, re-testing the October low in April this year with a low of 624 and again in June at 628. These tests are likely to establish support at the 614 to 624 range. With a breakout of 650 during the week of July 8–12, the REIT Index is likely to head towards 720–730. An important resistance level is at the twice-tested 733 level.
An interesting observation is that US REITs have rallied more than S-REITs. The S&P US REIT Index is up 6.5% from a year ago and up around 3% this year. In the same period, the FTSE REIT Index is down 34 points y-o-y and 55 points or 7.6% year-to-date.
According to a report by Goldman Sachs on July 18, the lower bond yield is not fully reflected in the price performance of local property stocks and REITs. “We believe the scenario has not been fully reflected in share prices, with our REITs coverage pricing in a 3.4% risk-free rate vs 3.0%, the current 10-year bond yield,” Goldman Sachs says, referencing the 10-year SGS yield.
“In the upcoming 2Q2024 results, we expect REITs’ topline to hold up well but distributions per unit (DPU) to decline by 1.9% y-o-y on average and we are 1% [more bullish than] consensus. The key focus will primarily be on interest cost, REITs’ guidance on fundamentals, CLI’s divestment guidance and potential platform acquisition, and City Development’s deployment strategy,” Goldman Sachs says. REIT managers have widely warmed that their cost of debt may continue to rise as cheap Covid debt rolls off.
See also: STI experiences temporary correction as high risk-free rates cloud outlook for S-REITs
Goldman Sachs is recommending “buys” on CapitaLand Investment, UOL Group, CapitaLand Ascott Trust (CLAS), CapitaLand Integrated Commercial Trust (CICT), Mapletree Industrial Trust (MINT) and Mapletree Logistics Trust .
In a REIT update on July 14, JP Morgan says its economists expect the first rate cut in September, followed by quarterly rate cuts in the aftermath. JP Morgan acknowledges that this view is ahead of expectations and represents a dovish outlook compared to the consensus.
“We see prospects of further upside ahead on the back of light positioning and S-REIT underperformance year-to-date versus the Straits Times Index and other regional REIT markets such as Australia. We continue to like quality S-REITs such as CICT and Frasers Centrepoint Trust ,” JP Morgan says.
See also: STI tests resistance, may attempt breakout
Additionally, the US bank believes that some “beaten-down names” such as Mapletree Pan Asia Commercial Trust , Frasers Logistics and Commercial Trust, and MINT could return to favour. JP Morgan has also upgraded MINT to “overweight” from “neutral” with a target of $2.50. MINT last traded at $2.30.
