Reit trading more volatile after MAS move on S$

Singapore

REAL estate investment trusts (Reits) are getting traded with heavier volumes and more dramatic swings in prices since Singapore's central bank eased monetary policy last Wednesday.

CapitaMall Trust, for instance, had gained 10 per cent from the start of 2015 to reach a one-year peak of S$2.25 on Jan 23 before losing steam. It last traded at S$2.12 on Tuesday.

Ascendas Reit followed a similar trajectory, gaining 8 per cent to a year-high of S$2.60, only to plunge to S$2.48 on the day of the Monetary Authority of Singapore's (MAS) announcement two days later, before rallying back to S$2.58 on Tuesday.

After the MAS said in an unscheduled announcement that it would allow the Singapore dollar (SGD) to appreciate at a slower pace against a trade-weighted basket of currencies, the trading volume of Reit units first fell for two days, then shot up 40 per cent on Friday.

Reit prices fell 1.4 per cent from Wednesday to Friday (versus the Straits Times Index's 0.8 per cent decline) last week. They have since rallied, though not yet to pre-announcement levels.

Analysts say this is not surprising, given that a weaker Singapore dollar is expected to lessen the appeal of SGD-denominated assets.

On Tuesday, the Singapore dollar traded at S$1.3515 per US dollar, recovering from the trough of S$1.3530 a day after the MAS announcement.

DMG & Partners Research analyst Ong Kian Lin said: "Singapore's physical property price indices historically have a more than 90 per cent correlation with the strength of SGD vis-à-vis the USD. This likely explains the immediate unnerving response."

The effect also feeds into property-related counters such as Reits.

According to DBS Group Research, since the first round of US quantitative easing in 2008 (and there has been three since), there has been a greater negative correlation between a weakening USD/SGD exchange rate and Reit prices. This means that as the USD weakens against the SGD, Reits do better on the stock market.

"With this trend expected to reverse in 2015, we see less of a pull for S-Reits from 2015 onwards," DBS analyst Derek Tan said.

The Reit sector had actually done very well, rising 4 per cent from the start of the year until the MAS announcement. Mr Tan said: "I think there was a bit of froth in the sector and prices ran up a bit too hard."

The other reason for the drop could be that some Reits were trading ex-distribution, following their results release. But Mr Tan noted that for some counters, their prices have dropped more than their distribution quantums.

Meanwhile, uncertainties in long-term US government bond yields are also affecting the rate-sensitive, yield-driven Reits.

According to DMG, last week, US risk-free rates fell 15.6 basis points to 1.64 per cent - reminiscent of levels just before the infamous "taper tantrum" in May 2013 when Reit prices tanked.

Analysts are split on how much long-term US Treasury yields will increase this year, due to varying global growth prospects in the US, Europe, China and Japan, as well as divergent monetary policies in different countries.

And while the price rally in sovereign bond markets can result in higher Reit prices, a hint of rising rates could cause them to plummet instead.

In all this, the possible beneficiaries among S-Reits might be those with foreign-based assets that generate revenue in the US dollar, euro or pound.

DMG's Mr Ong said that for such Reits, their income will see a boost when translated to distributions in SGD (if they have not already hedged their forex exposure). And if they practise natural hedge, matching their foreign liabilities with their assets exposure, their SGD-denominated net asset values will also see increases upon half-yearly or annual revaluation.