Singapore Reits' winning streak appears to have faded

THE performance of Singapore real estate investment trusts (S-Reits) has simmered down somewhat in the quarter-to-date, compared to their euphoric price upsurge in Q2.

This quarter, S-Reits appear to be underperforming against both developer stocks and the broader market; this is in stark contrast to May, when they outperformed both developers and the Straits Times Index (STI).

The FTSE ST Reit Index has wilted by 0.5 per cent this quarter, following a 6.4 per cent surge in Q2.

In comparison, the index which tracks developers has risen 1.2 per cent, following a ferocious 5.3 per cent increase in Q2; the STI has risen 2 per cent, after climbing 2.1 per cent in Q2.

The fact that safe-haven Singapore Government Securities (SGS) bonds have risen by about 0.2 per cent this quarter further accentuates S-Reits' under-performance, Citi Research said in a Tuesday report.

It noted that there has been a reversal in investors' "flight to safety" and aversion to China in recent weeks, compared to Q2.

The S-Reit sector has become very influenced by macro-economic factors. The Citi Research report said: "As a result, the quarter-to-date performance across the sector has been relatively flat, as investors come to the realisation that headwinds abound everywhere one looks."

"Our guess is that the basis for stock selection has come down to 'the least of the known evils', with any potential for growth becoming a slight differentiator," it said.

The euphoria in Reit prices in Q2 was a response to expectations of an impending interest rate hike, which was originally expected to happen this year-end. It is now widely assumed that the hike will come late next year.

Better operational performances, palatable valuations and stable bond yields further fanned this optimism. Some Reits such as CDL Hospitality Trusts and Suntec Reit did so well that analysts removed them from their top picks on their expensive valuations.

Now, the Citi analysts believe that most S-Reits' distributions per unit could fall by up to 2 per cent for every 0.25 per cent increase in short-term borrowing rates - a phenomenon over which the sector is holding its breath while awaiting the US Federal Reserve's indications.

Last week, the Federal Open Market Committee did not say when it may begin to raise short-term rates; it merely repeated previous guidance that "it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase programme ends".

The Citi analysts said Reits such as CapitaMall Trust, Frasers Centrepoint Trust and Soilbuild Reit, which have more than 90 per cent of fixed-rate borrowings and less debt due for re-financing, will likely be less hit by higher borrowing costs.

Meanwhile, Reit managers have taken advantage of the current low interest rates to proactively refinance their expiring debt - evident from numbers showing that they now have less debt expiring in the next two years than a quarter ago.