iEdge S-Reit Index Weekly Review 21 Oct 24
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Developments, Sentiments and Performance of S-REITs
Recent Acquisitions Boost DPU
Many S-REITs have recently announced acquisitions to boost their DPU. Falling interest rates make acquisitions easier as the threshold for an acquisition to be yield-accretive declines. Here are a few major examples:
● CapitaLand Integrated Commercial Trust (CICT) acquired a 50% interest in ION Orchard Mall in Singapore. The acquisition is expected to increase CICT’s DPU by around 0.9%.
● Mapletree Industrial Trust (MIT) acquired a freehold property in Tokyo, Japan. This acquisition will increase MIT’s exposure to the Asia Pacific data centre market.
● CapitaLand Ascott Trust (CLAS) acquired lyf Funan Singapore. This acquisition is expected to increase DPSS by 1.5%.
Market Sentiment and Performance
Looking at the chart above, you can see the iEdge S-Reit Index (in blue) recovering after hitting the support region. The US 10 Year Yield remains relatively elevated and hence from a technical point of view, there may be some downside pressure.
As S-REITs started to report their earnings and dividends for the third quarter of 2024, Singapore REITs with US exposure rebounded further as strong economic data in the US eased concerns about a potential recession.
Analysts’ Expectations
Analysts expect most REITs to post year-on-year DPU declines in the third quarter of 2024 due to higher interest expenses. However, DPU is expected to return to growth in 2025 as S-REITs begin to benefit from lower interest rates with the gradual expiration of interest rate hedges. As I mentioned previously, any interest rate cut will take time to trickle down hence do be cautious about any premature “rally”.
For those who are new, S-REITs are sensitive to changes in interest rates, as higher interest rates increase their borrowing costs and can make it more difficult to make accretive acquisitions.
A Point to Ponder
Choosing SREITs that are well managed is key to success. I am looking at SREITS with a lower interest rate hedging ratio as they may stand to benefit more from interest rate cuts because a larger portion of their debt is exposed to floating rates. As interest rates decline, their financing costs will decrease faster compared to SREITs with higher hedging ratios, leading to potentially higher DPU growth. Having said so, overall loan burden should not be overwhelming too as costs will take time to drop.
Be on a look out for more monetary easing as it could further reduce financing costs for SREITs, boosting profitability and supporting acquisition activity.
Tune it now to our podcast segment and dive deeper into the SREITS developments!
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