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S-Reits a safe haven yield play post-Brexit: analysts

They are seen benefiting from expected delay in US rate hike; but those with UK and EU exposure have to reckon with currency risk exposure
Tuesday, June 28, 2016 - 05:50

Singapore

AS global investors rush to safety following the "Brexit" vote, Singapore Reits (S-Reits) will probably benefit, analysts said in reports on Monday.

This is on the belief that the US Federal Reserve will likely delay the hiking cycle to December 2016 at the earliest, if it even raises rates at all this year, instead of the previous forecast rise in September 2016.

This implies lower interest rates for longer as Singapore's 10-year government bond rates usually take the cue from US Treasuries. Lower rates are good news for rate-sensitive Reits from a credit cost and yield spread perspective.

The benchmark 10-year Treasury note yield approached an almost four-year low of 1.4 per cent on Friday, the day the referendum results were out. US bonds aside, analysts also see S-Reits as another "safe haven" yield play for investors seeking refuge amid risk-off sentiments.

Bank of America Merrill Lynch (BofAML) said: "On a yield-spread perspective, S-Reits could be seen as a relatively defensive sector in the expected volatile markets to come... With higher risk aversion, the hunt for yield receives even more attention with Brexit."

Religare also expects S-Reits to outperform the broader market over the coming months, particularly those with no exposure to the UK and the European Union (EU). This is due to their stable earnings profile and the likely delay in Fed rate hike.

But the fortunes will be different for Reits with UK and EU exposure, it said. These include CDL Hospitality Trusts, Ascott Residence Trust, IReit Global, Keppel DC Reit and Frasers Hospitality Trust (see table).

"The net asset value (NAV) of these Reits could be hit as consensus forecasts the pound to tumble 15-20 per cent post-Brexit", Religare said.

"Though no official forecast is available, we expect the euro to remain volatile as Spain and France step into their general and presidential elections (in June 2016 and April 2017, respectively), where Brexit could potentially set the pace for these and several other countries (potentially including Sweden, Italy, France) to leave the EU.

"Based on our estimates, if the GBP and euro were to correct by 10-15 per cent, the NAV of these Reits could dip by an average of 0.5-2.8 per cent over the near-to-medium term due to volatility of these currencies against SGD; the most severe impact would be on IReit given its 100 per cent exposure to EU."

Religare is also reviewing its risk-free rate assumption, currently set at 3.4 per cent.

According to Bloomberg data, there is now an expectation of a 10 per cent probability of a rate cut when the Fed next meets on July 27. Conversely, there is a zero per cent probability of a rate hike.

With the yield spread to 10-year Singapore government bond yields widening back to 485 basis points (bps), against a long-term average of 360-380 bps, plus the 1-2 per cent per annum projected sector growth from 2015 to 2017, Religare believes that S-Reits can offer an attractive 8-9 per cent total return per year.

Like Religare, DBS's currency strategist warns that in a worst case scenario, the pound could fall up to a further 20 per cent against the US dollar, which could affect counters with UK or EU exposure.

Within the developer circle, these include City Developments, Ho Bee and Frasers Centrepoint.

BofAML downgraded price targets for the two developer stocks with the greatest exposure risks (among those that it covers). These are City Developments (down from S$9.85 to S$9.55) and Frasers Centrepoint (down from S$1.89 to S$1.80). It also cut its FY16-18 earnings per share by 4-10 per cent.

City Developments fell 3.7 per cent to S$8 on Monday; Frasers Centrepoint lost 0.3 per cent to S$1.525. The FTSE ST Reit Index rose 1.4 per cent to finish at 718.62.

READ MORE: Reits shine amid post-Brexit volatility

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