Increase in long-term interest rates... Recently, the bond market has been volatile with the selloff in U.S. and European government bonds, resulting in the increase of long-term yields. Meanwhile, the market is expecting the Fed to announce an increase in interest rates this year, and this may happen as early as 17 June following the FOMC meeting.
...adversely impact REITs. It is unsurprising that the anti-correlation of REIT prices with the 10Y SG Government bond yield resulted in the decline of the FSTE ST REIT Index since 25-May this year (Figure 1) when the long-term interest rates rose steeply.
Shift to the higher yielding REITs in the face of rising interest rates. We performed a study on the 2013 taper tantrum, which was similarly a Feddriven event that led to rising long-term interest rates. While REITs in general performed poorly, the higher yielding REITs had more often outperformed the lower yielding REITs. This is because in addition to the larger yield spreads which may reduce interest rate sensitivity and capital losses, the total returns were supported by higher dividends.
REITs are not overpriced, however. Although interest rates have climbed, we do not think that the current general REIT market is overpriced, and hence may not see a similar magnitude of decline as 2013. REITs are yielding roughly in-line with the levels seen post 2013 taper tantrum selloff. The yield spread of FSTE ST REIT Index over the risk free rate is also not too tight in comparison to historical figures.
Several high-yielding REITs still looking attractive. Just recently, we shaded down our target prices of REITs after increasing the risk free rate assumption by 40bps to 3.1%. Even at more punitive rates, we could keep Soilbuild REIT and Croesus Retail Trust at BUY with a target price of S$0.900 and S$1.030, supported by their high yields of 7.4% and 8.7% respectively. On the other hand, we had to cut the lower yielding Frasers Centrepoint Trust at 5.7% dividend yield from BUY to HOLD, with a target price of S$2.030. Unless one expects the 10Y risk free rates increase significantly beyond today’s levels of ~2.7%, Soilbuild REIT and Croesus Retail Trust continue to look attractive. (Read Report)
Read Related Report
The REITs Pulsebeat - Weekly Review Report
Monday, 15 June 2015
Monday, 15 June 2015
- RHB Research
Source : KGI Fraser Research