The Federal Reserve’s recent decision to cut interest rates by 50 basis points, signaling an easing of global financial conditions, has significantly boosted the attractiveness of Singapore Real Estate Investment Trusts (S-REITs) for retail investors, which have already been on a positive trajectory.
Since the end of June 2024, the iEdge S-REIT Index has generated a 15.3% total return through to August 30, reversing an 11.4% decline in the first half of the year (1H2024). In August, the REIT sector saw a net institutional inflow exceeding S$90 million, following July’s S$15 million. This recovery, from predominantly net outflows during 1H2024, has been largely driven by the anticipation of the Fed’s rate cut, which has now materialized.
Key S-REITs to Watch
The iEdge S-REIT Index is a benchmark index that tracks the performance of the most liquid and largest S-REITs. The 31 constituents of the index have generated a median total return of 13% since the end of June through to September 9, with all constituents posting gains. Out of these constituents, some key S-REITs to watch are:
- Keppel Pacific Oak US REIT (KORE) (SGX:CMOU): KORE has delivered a 26.9% total return in August and has a forward dividend yield of about 26.35%. As of June 30, KORE has a leverage ratio of 42.7%, with portfolio occupancy of 90.7% and an interest coverage ratio of 2.9x. The trust plans to refinance loans maturing in 2024 and 2025 ahead of schedule, avoid selling properties at substantial discounts to their current valuations, and continue investing in the portfolio to maximize net property income, with the goal of resuming distributions by FY2026.
- Prime US REIT (SGX:OXMU): Although Prime US REIT reported a 92% year-on-year (YoY) decline in distributable income for 1H2024, its strategic moves, including securing a US$550 million credit facility, have positioned it for future growth. The trust’s leasing volume doubled from 1H2023 to 1H2024, reflecting improving confidence among US office tenants. As of June 30, the trust’s leverage ratio stands at 48.9%, with an interest coverage ratio of 2.8x and portfolio leased occupancy of 83.9%.
- Manulife US REIT (MANU) (SGX:BTOU): MANU has shown a remarkable turnaround from a US$247.6 million loss YoY in 1H2023 to a net income of US$15.8 million in 1H2024. With a recapitalization plan in place, MANU will continue to optimize its portfolio, focus on asset, lease, and capital management, in addition to its commitment to sustaining and enhancing its ESG performance. In 1H2023, the trust reported a leverage ratio of 56.3% and an interest coverage ratio of 2.2x, with distributions halted until the end of 2025.
- Keppel DC REIT (SGX:AJBU): Keppel DC REIT experienced a positive rental reversion exceeding 40% for a significant renewal contract in Singapore during 2Q2024. The trust’s recent acquisition of a data center in Tokyo marks its entry into Japan, further boosting its growth potential. The REIT benefited from rising data center rents in Singapore, which make up 53% of its portfolio valuation. As of June 30, Keppel DC REIT has portfolio occupancy of 97.5%, a leverage ratio of 35.8%, and an interest coverage ratio of 5.1x.
- Suntec REIT (SGX:T82U): The stronger operating performance at Suntec City office, mall, and convention center have supported its 1H2024 performance. The trust’s strategic divestments and focus on debt reduction are additional positives. As of June 30, the trust has a leverage ratio of 42.3% and an interest coverage ratio of 1.9x, with rental reversions across other segments of the trust’s portfolio in the high single digits or low double digits for 1H2024.
Why S-REITs Are Attractive Now
- Yield Advantage: When the Fed cuts interest rates, the yields on traditional fixed-income investments like bonds typically decrease. This makes the higher yields offered by S-REITs even more attractive in comparison. Investors may seek higher returns from S-REITs, driving up demand and potentially increasing their market value.
- Growth Potential: The positive momentum in the S-REIT sector, coupled with favorable macroeconomic conditions, sets the stage for continued growth. The influx of institutional funds is a testament to the sector’s attractiveness.
- Improved Gearing: The Fed’s rate cut and the potential for further reductions can lower borrowing costs for S-REITs. This can improve their leverage ratios, making it easier to manage debt and invest in growth opportunities.
In summary, the Fed’s rate cut enhances the yield advantage of S-REITs by making their higher dividend yields more attractive relative to other investments, while also reducing their borrowing costs and boosting their overall appeal to investors.
Disclaimer: ProsperUs Manager of Content Hailey Chung doesn’t own shares of any mentioned companies.
Reference
REIT Watch – S-REITs continue their positive momentum in August with a second consecutive month of gains – Singapore Exchange (SGX)
