AS THE interest rate cycle turns this year, we see opportunities arising among property stocks across Asean, including Singapore.
Rising interest rates drove declines across property stocks in most major markets in 2023. We think falling interest rates in 2024 could offer some relief. Given a still-uncertain global growth outlook, discernment in stock selection remains key. We recommend adding exposure to sectors offering more visible growth drivers or a more evident dislocation between valuations and fundamentals.
Early-cycle winners
Real estate investment managers appear to be the most positively levered to a lower interest rate outlook relative to other types of property companies we cover. And the interest rate cycle seems to be peaking. Our economics team expects four policy rate cuts totalling 100 basis points from the Federal Reserve this year, starting in June.
We believe the market expectations for lower – as opposed to higher – interest rates in the months ahead will support a recovery in sentiment among institutional investors on the real estate asset class in 2024. This, in turn, is likely to translate into more capital allocation in real estate funds, and will re-accelerate the pace of growth for managers’ assets under management and fee earnings.
We also expect lower rates to drive a revival in real estate transaction activity, another key driver for fee earnings. Overall, with valuation multiples poised to rebound on an improving earnings outlook, real estate investment managers will most likely be early winners as the interest rate cycle turns this year.
Better year for Singapore Reits
Having underperformed the broader market last year, Singapore real estate investment trust (Reits) look well-positioned to perform better this year. Singapore Reits corrected 7 per cent on average in 2023, against a flat FTSE Straits Times Index. Valuations appear more reasonable now.
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While still below that of the Singapore banks, dividend yields of larger-cap Reits have widened, as have their dividend yield spread over 10-year Singapore government bond yields – which have eased from last year’s highs. The more moderate outlook for short and long-term interest rates likely limits downside risks for Reits, and we believe that select Reits could look attractive to funds still underallocated to the sector.
We favour Reits with portfolios skewed towards Singapore (as opposed to overseas) properties, given the resilience of the Republic’s commercial rents and valuations. By sector, the industrial Reits we cover seem better placed, offering stronger balance sheets, more growth opportunities via acquisitions and a positive rental outlook. We see growth in Singapore industrial rents being led by the logistics sub-segment, where we expect 4 per cent growth this year.
Office and retail rents, on the other hand, are likely to be broadly stable in 2024, tracking within 1 to 2 per cent of last year’s levels. Hotel room rates, which have risen substantially above pre-Covid levels in 2019, will likely remain stable as well, though room occupancies could edge up. However, the dividend yields and dividend growth profiles of the Reits we cover with office, retail, and hotel portfolios, however, do not seem nearly as attractive as the industrial Reits.
Opportunities in Philippine, Vietnam developers
The Philippine property developers we cover are set to deliver a fourth consecutive year of double-digit growth in residential sales in 2024, underpinned by robust economic growth sustained at over 5 per cent. Fiscal stimulus plans are in place to boost job creation through improvements in infrastructure, funded by a 10 per cent bigger government budget this year.
Given the steady economic growth outlook, we believe positive momentum in homebuyer sentiment through 2023 will persist through 2024. This will likely underpin double-digit growth in developers’ earnings, even as they currently trade at below-trend valuation multiples.
In Vietnam, property stocks also feature relatively cheap valuations, following sharp declines last year. In 2023, developers’ home sales volumes contracted as buyer sentiment deteriorated on concerns over Vietnam’s anti-graft drive, and tighter credit conditions.
However, from our recent trip to Hanoi and Ho Chi Minh City, we observed that business and consumer sentiment is improving, particularly in Hanoi, amid falling interest rates and anecdotally positive responses to new project launches. The investment community also appears increasingly hopeful that index providers will upgrade Vietnam from frontier to emerging market status, which would likely drive capital inflows.
Tread cautiously among Singapore, Thai developers
Singapore developers, on the other hand, face a more challenging outlook for the housing market in 2024. Home prices in the Republic have risen every year for seven consecutive years – the longest upcycle since the 1980s. We believe the housing market is now on the cusp of a downcycle.
We see home prices falling 3 per cent this year as earlier demand-supply imbalances reverse. Land supply from Government Land Sales auctions has risen to a decade high, while demand might contract from these factors:
- Fewer qualifying buyers upgrading from HDB flats
- A falling rental outlook
- Prohibitively high stamp duties for foreign buyers
Furthermore, the largest listed developers by market capitalisation appear to be at risk of not retaining their places as constituents of the MSCI Singapore Index. Such an occurrence could lead to near-term passive outflows, weighing on their valuation multiples.
Thailand’s property stocks will likely benefit from an ongoing recovery in visitor arrivals to the country in 2024. However, we see headwinds from a slower pace of growth in mall rents and hotel room rates, as well as supply pressures in the housing sector in the year ahead.
Property companies, especially those that have expanded more aggressively, will likely also have to contend with higher borrowing costs on a higher amount of borrowings. Stock valuation multiples have broadly recovered to pre-pandemic 2019 levels. But given the relatively subdued outlook, we see limited opportunity for these multiples to expand.
The writer is Singapore equity strategist and head of Asean property, Morgan Stanley Research
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