It appears that real estate companies have put too much faith in interest rate cuts this year. No surprise then that they have been among the worst performers since the start of the month while the local banks have been resilient.
CapitaLand Investment (CLI) is at its lowest level since its restructuring in 2021. The decline is largely driven by sentiment as Federal Reserve chair Jerome Powell had “signalled” on April 16 that the Fed may have to wait longer before cutting interest rates as a consequence of recent elevated gauges of inflation.
CLI relies on “patient capital”, making insurance funds, sovereign wealth funds and pension funds its capital partners in its private funds. However, the larger part of its funds under management as at FY2023 is from its publicly-traded REITs. Retail investors and hedge funds comprise “impatient capital”.
CLI’s S-REITs and trusts are down year to date and on a one-year basis. Although their operational performances have been steady, CLI’s S-REITs have suffered from sentiment-driven selldowns as a result of the spread of their yields versus risk-free rates. Rising risk-free rates generally cause the trading price of REITs to fall.
Operationally, the big three — Capitaland Integrated Commercial Trust, CapitaLand Ascendas REIT A17U and CapitaLand Ascott Trust HMN — have high occupancies, positive rental reversions and modest but stable net property income growth. More than 75% of their debt is fixed with a weighted average cost of debt between 2.4% to 3.6%. Additionally, the weighted average debt to maturity at three to four years for the big three takes them into an easing cycle when interest rates are likely to fall.
Separately, CLI’s management has articulated it is likely to acquire a platform but it is not likely to participate in a competitive bidding process to do so.
See also: STI continues to move sideways as ominous signs develop in US Treasury yields
In sum, there is no reason for CLI’s share price to fall except for interest rate-related news. Once more evidence emerges for the Fed to cut rather than hold the Federal Funds Rate, the more likely it is for CLI to rebound since technical indicators are at rock bottom. First stop on the upside is likely to be $2.77.
City Developments’ (CDL) share price is near a 10-year low. To date, share buybacks have not stopped the negative sentiment surrounding CDL’s share price. Technically, the stock should be attempting to form a double-bottom given that prices are approaching and likely to re-test the 10-year low of $5.55.
A double-bottom requires the volume on the second low to be light, especially compared to the $5.55 level formed on March 5–6. This is indeed the case. Since the move is a developing one, it is too early to turn decisively bullish on this stock.
See also: STI steadies despite overbought US markets and rising US risk-free rates
Additionally, CDL’s cost of debt is at 4.3% and its gearing including fair valuations of its portfolio is at 0.61 times. Both metrics are higher than CLI which has a gearing of 0.56 times and a cost of debt of 3.9%.
In FY2023 ended December 2023, CDL acquired $2.4 billion of properties including St Katharine Docks for the equivalent of $636 million.
During its FY2023 results briefing, CDL’s management had announced plans to divest $1 billion in assets. Edgeprop reported that CDL has put up the Delfi Orchard for collective sale at $438 million. Edgeprop also reported that on April 12, “CDL rolled out for sale a portfolio of 27 strata-titled commercial units at Fortune Centre and another 20 strata-titled commercial units at Sunshine Plaza”.
In a previous briefing, CDL’s management had indicated it planned to divest its Mortlake project in the UK.
In the meantime, analysts have indicated that Jardine C&C, CDL, Mapletree Pan Asia Commercial Trust N2IU (MPACT) and Seatrium are at risk of being excluded from the MSCI Singapore Free Index.
The two stocks with the lowest weight and highest risk of exclusion are CDL and Jardine C&C. The review is on either April 17 or April 30, the announcement is on May 5 and implementation will be on June 3.
