The i-Edge S-REIT Index recovered by 5.7% last month, after a 5.6% decline in October.
The rebound came amid less hawkish rates expectations from the US Federal Reserve (Fed).
The Fed has hinted of slower rate hikes going forward and investors will be keeping an eye on its FOMC meeting next week.
Top REITs in November were data centres, diversified and industrials
In November, retail investors were the key driver in the sector’s fund inflow activities, accumulating net retail inflows of S$54 million.
The top sectors in the Singapore REITs (S-REITs) market were data centres, diversified and industrials, which saw an average total return of 12%, 8% and 4%, respectively, during the month.
Six S-REITs reported double-digit returns in November.
End of rate hike cycle in sight?
According to Bloomberg consensus, US Fed will slow down its rate hikes next week with a 50 basis point (bp) hike and another 50bp hike in Q1 2023 before pausing by the middle of 2023.
This is after the Consumer Price Index (CPI) data in October rose at 7.7%, a much slower pace of increase than the 8% economists were expecting.
The recent moderation in commodity prices also supports a lower inflation going forward.
While it is too early to determine when the rate hike cycle will come to an end, a slower rate hike cycle and lower inflation are both positive for S-REITs.
S-REITs have strong balance sheets
Aside from that, S-REITs have a strong balance sheet.
At the end of the Q3 2022, the average sector gearing level is at 38.5%, which is well below the 50% guideline ceiling.
The rising interest rate environment’s impact on S-REITs in the near term is also less pronounced since about 75% of the total debt is under fixed rate while its debt profile is also well-balanced.
Source: CGS-CIMB Research
Uneven recovery for S-REITs
The recovery for S-REITs is likely to be uneven given the sharp rise in interest rates during such a short period of time.
Those with strong balance sheets and low gearing are in a better position while recovery within the different subsegments will see different results as well.
For example, the reopening in China should boost the return of China tourists. This will benefit S-REITs that own and manage the retail segment as well as those in the hospitality sector.
On the industrial subsegment, demand for factories has been supported by continued growth in high-end manufacturing such as bio-medical, electrics & electronics and other added-value manufacturing in Singapore.
As for the office REITs, Singapore office rents remain resilient in 2022 and rose by 6.3% during the first nine months of this year.
There are concerns on future demand for office amid the rise of “hybrid” working environment and slower economy but the limited supply could cushion the slowdown.
Near-term volatility but attractive yield for long-term investors
As investors continue to pay attention to the macroeconomic outlook and the US Fed’s rate hike cycle, S-REITs should see some near-term volatility.
With earnings likely to be affected by inflationary pressure and rising interest rates, share price weakness is likely to persist.
However, long-term investors should find the opportunity to buy into S-REITs and tap its attractive yields.
Currently, S-REITs are trading at 6.2% yield, translating into a 360 bp spread over the Singapore 10-year bond.
Among some of the key risks that investors need to pay attention are persistent high inflation, a protracted period of high interest rates and earnings drags in the near term.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
