Silver lining for S-Reits in H2 as sector ‘bottoms out’ and rate hikes ease

REAL estate investment trusts (Reits) have been pummelled by fears of rising interest rates, even as effects of the Covid-19 pandemic continue to linger.

The FTSE EPRA Nareit Developed Index, a global Reits benchmark, saw total returns slide to negative 18 per cent for the first half of 2022.

This comes as the US Federal Reserve wages war on inflation with a series of interest rate hikes.

Most recently, in June, the Fed raised the federal funds rate by 75 basis points to 1.5-1.75 per cent – its biggest hike since 1994 – which sent investors running for the hills.

The way DBS analyst Derek Tan describes it, the second quarter had been a period of “maximum fear”.

However, he believes investors should be looking to add at current prices and valuations as we move into the second half of the year.

“In general, we believe that the Reits sector is bottoming out given that we are now close to the end of the most aggressive rate hike momentum by the Fed,” Tan told The Business Times.

The second half of 2022, Tan opines, will see a more modest rate hike momentum that is more data-driven.

Amid the global market uncertainties, market watchers note that Singapore Reits (S-Reits) are in a better position than their global counterparts.

S-Reits have, in fact, been significantly more resilient and outperformed the global markets so far this year. Compared to the steep decline for the global Reits benchmark, the iEdge S-Reit Index in H1 generated flat total returns.

“We believe the Singapore market is slightly better positioned in terms of economic growth backed by strong government support policies, full reopening of the economy and capturing the shift in demand arising from strict Covid zero policies in North Asia,” RHB analyst Vijay Natarajan told BT.

For the second half, Reits in the office, suburban retail and industrial sectors could be potential beneficiaries from “structural growth trends,” the analysts say.

Both Tan and Natarajan point out that Reits with a Singapore office focus are likely to benefit from a lack of supply even as more firms are seen setting up their headquarters here.

In part, this is likely to be driven by “increased demand from tech and co-working firms and a shift in office demand in Hong Kong”, Natarajan said.

Meanwhile, market watchers also favour the retail Reits – particularly those with suburban properties.

While suburban malls had been resilient amid pandemic-related lockdowns and changing shopper behaviour, there are no signs yet that these malls outside of the city centre will see their strong performance taper off due to the reopening of borders and the return to office.

Tan noted that suburban retail sales appear to be “sticky” at close to 10 per cent above pre-Covid levels.

Veteran Reits investor Gabriel Yap, chairman of investment firm GCP Global, said the Singapore retail Reits are displaying “strong pricing power” after showing resilience through Covid-19.

“The pricing of the Mercatus portfolio sale could set a new higher benchmark for retail assets, especially those in locations next to MRT stations and serve a commanding suburban population,” Yap added.

BT in June reported that Mercatus Co-operative, a unit of NTUC Enterprise, is putting up a bundle of 4 of its suburban retail properties in Singapore for sale with an expected price tag “in excess of S$4 billion”.

The 4 retail malls are Jurong Point, AMK Hub, Mercatus’ half-stake in Nex, and some 110,000 sq ft of strata space in Thomson Plaza, which is branded as “Swing By @ Thomson Plaza”.

At the same time, the analysts believe the industrial Reits could offer the best defensive plays under the uncertain current market conditions.

“Data-points such as manufacturing growth and the Purchasing Managers' Index (PMI) still point to expansionary demand in the Singapore industrial sector,” Natarajan said.

For now, however, all eyes are on whether the central banks are able to dodge a potential recessionary scenario.

“The key challenge that investors must watch out for is the persistent inflationary pressures and whether central banks are able to tackle inflation by raising interest rates without inflicting too much damage to economic growth,” Natarajan added. “If central banks are able to achieve a soft landing by controlling inflation without severely damaging growth, we see more upside potential for Reits.”