Money and Me: S-REITs after the sell-off - bargains or yield traps?

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Lance Alexander (0:19)

Yes indeed, let's bring on SREITs, because prices have fallen. But does that mean they're worth buying now? The FTCST REIT index dropped 5.7% in September, even as UOB Ke Hien points to firm property valuations and low domestic borrowing costs.

Lower prices have also made yields more attractive. CapitaLand Ascendas REIT, Mapletree Industrial Trusts and CapitaLand REIT offered annualized yields above 6% at late September prices. But can those payouts last? Some distributions have fallen, while capital REITs include temporary payments. Meanwhile, the Business Times Commentary also asked whether Singapore needs fewer and bigger REITs as rising interest rates and prices below net asset value strengthen the case for mergers.

So are investors being offered sustainable income at better prices and could mergers improve their returns? Are lower prices giving investors an opportunity or reason to be cautious? As a high yield today may not be a yield you get tomorrow. Kenny Loh once again joins us. He is a REIT Specialist and Wealth Advisory Director. Kenny, good morning.

Kenny Loh (1:37)

Good morning, Lance.

Lance Alexander (1:38)

Hey, thanks for joining us once again. We have to start with the SDI. It was down 3.49% yesterday.

Maybe you can tell us whether S REITs were badly hit.

Kenny Loh (1:48)

Actually, from the chart itself and also from the price action itself, S REITs are holding pretty well. It's not a surprise because I wrote an article at the end of September with the title, is the FTSE S REIT index finally finding a bottom. There are two reasons the S REITs are really not affected by this time the bank sell off or SDI sell off.

The reason being is because at the current level, the FTSE REIT index level of about 620, is actually close to the COVID low. March 2020 during the COVID crash. That's why we are reaching that previous low level. That is more on the chart itself. And 620 proved to be a strong support over this year. So we are more or less based on the chart itself finding a bottom. That's the first reason. And the second reason will be based on the valuation. Unlike the bank, why there was a bank sell off yesterday because due to the overvaluation of the bank sector. So at the present moment, the price of the REIT sector is about 0.77. That means that 23% discount to the BOOK value is really cheap. And average sector DPO of about 6.2%.

So in terms of valuation, in terms of the chart technically, basically we are reaching a very attractive level. That's why I don't see any strong reaction or strong sell off from the REIT sector.

Lance Alexander (3:11)

Okay, Kenny, so our three major banks taking the brunt of the STI slip. But what has driven SREIT's sell off for last month, September?

Why have SREIT prices fallen?

Kenny Loh (3:24)

Yeah, the primary catalyst was a sudden spike in the long term bond yield, right? Yesterday, after the FOMC, they have 25 basis point interest rate hike. So that actually followed by the Singapore 10 year bond yield jumped roughly 23 basis point to around 2.6%.

That alongside with the rising US treasury yield of about 5.3% is pretty high over compared to the past few years. And because the REIT are priced relatively to the REIT free benchmark yield, and also the higher bond yield compressed the yield spread and facing the unit price has to go downward because they have to do the adjustment. So the FTSE REIT index as a result deep over 5.7% over the past month. Now, the next question will be, is the sell off justified? I think most people will be asking that question. In my view, it is overdone, really overdone. If you look under the hood, key operating fundamentals across some of the major S-Rates, not all, still remain sound. If you check in detail, you can see that actually the occupancy rates are healthy. The rental reversion still stay positive. And also the asset valuation have helped firm. And some of them, the asset valuation actually increased a little bit. So actually the market pricing in the macro rate anxiety, rather than operational deterioration.

Lance Alexander (4:51)

Yeah, but a lot of people are looking at these bonds and they're paying good interest. And there's so little risk as well. So that's a win for them too.

Kenny Loh (4:58)

The bond price, the long end bond price itself, if over the long term, basically the bond price will come down. So investors who hold in the long duration bond, basically they will suffer the price volatility over there. The only safer bond space will be more on a short duration, because with the rate hike, they can immediately maybe recycle the bond with a higher yield. Bond space also different ball game. Yeah. They have a long end and a short end.