iEdge S-Reit Index Weekly Review 28 Oct 24
Good day everyone!
This week, the Singapore REIT market took a hit as a jump in US government bond yields and disappointing earnings reports weighed on the sector. This downturn comes despite a recent interest rate cut, highlighting the ongoing challenges faced by S-REITs in a high interest rate environment.
Developments, Sentiments and Performance of S-REITs
This environment has put pressure on S-REITs, evident in several developments:
● Lower DPU: Many REITs reported a sharp decline in their dividend per unit (DPU) for the third quarter of 2024, raising concerns about the impact of elevated interest rates on their distributions. This is particularly noticeable in the performance of Mapletree Logistics Trust and Mapletree Pan Asia Commercial Trust (MPACT), both of which reported lower DPUs.
● Increased Borrowing Costs: Mapletree Logistics Trust’s DPU fell 10.6% year-on-year, partly attributed to increased borrowing costs. This illustrates the direct impact of high interest rates on REIT profitability.
● Debt Management Strategies: MPACT’s manager took steps to reduce borrowings in response to the high-interest-rate environment, leading to improved net finance costs for the quarter. This demonstrates the strategic measures REIT managers are taking to mitigate the impact of rising rates.
● Rising Leverage: CapitaLand Ascendas REIT’s aggregate leverage rose to 38.9% in Q3, up from 37.8% in Q2. While the manager maintains that this level remains healthy, it underscores the potential vulnerability of REITs to increased debt burdens in a high-rate environment.
These developments suggest that S-REITs are struggling to navigate the current interest rate landscape, even after a recent rate cut. While lower interest rates may eventually provide some relief, it will take time for the benefits to trickle down to the sector and restore investor confidence.
S-REITs Chart Analysis
Looking at the chart above we see the inverse correlation between the iEdge S-Reit Index (in blue) and the US 10-Year Treasury Bond Yield (in orange) continue. We see the US 10-Year Treasury Bond Yield spiked to a three-month high of over 4.2%, while the iEdge S-Reit Index plummeted below a resistance region.
What Is Happening?
The US 10-year Treasury yield has been on an upward trajectory, likely due to a surprisingly robust US economy and a shifting political landscape. Strong economic data suggests that the Federal Reserve may not need to cut interest rates as quickly or aggressively as previously thought. This positive economic outlook leads investors to anticipate that interest rates will remain higher for a longer period, driving down bond prices and pushing yields up.
Furthermore, improving poll numbers for former President Donald Trump have raised the possibility of a Republican sweep in the November elections, potentially leading to larger budget deficits. This prospect of increased government borrowing often translates to a greater supply of bonds in the market, which can lower the prices of existing bonds and, consequently, increase yields.
Rising US 10-year Treasury yields create headwinds for Singapore REITs (S-REITs) primarily through their influence on interest rates and investor behavior. S-REITs often rely on debt financing to acquire properties. When US Treasury yields rise, it becomes more expensive for S-REITs to borrow money, impacting their profitability and potentially reducing their ability to distribute dividends.
Higher US Treasury yields can make bonds a more attractive investment option compared to S-REITs, as bonds are generally perceived as less risky. This shift in investor preference can lead to decreased demand for S-REITs, putting downward pressure on their prices.
The increase in interest rates, influenced by rising US Treasury yields, can also lead to a decline in property valuations. Lower property values directly impact the asset base of S-REITs, potentially affecting their overall performance and investor confidence
Looking Ahead
The current environment, marked by rising US Treasury yields and a dynamic economic landscape, requires a selective approach to investing in S-REITs. Prudence and proactivity are key. It is crucial to focus on REITs demonstrating cost management, particularly their debt levels, to mitigate the impact of high interest rates. We should seek out REITs actively pursuing strategies to increase their DPU, whether through optimizing existing assets, strategic acquisitions, or venturing into growth sectors.
Besides the internal factors discussed, we should also be mindful of macro trends. The robust performance of data center REITs like Keppel DC REIT points to the growth potential of this sector. With increasing digitalization and data consumption, data canters are likely to remain in high demand, making data center REITs a potentially attractive investment option.
Tune it now to our podcast segment and dive deeper into the SREITS developments!
Dividends Pay For My Kopi S-REITs Podcast Content
- Why is the interest rate cut not helping
- Accepting the challenging situation
- Being selective in SREITs may help
- Why some SREITs are doing well
- Why some SREITs are not doing well
- Important to know what you are getting into
- Discussion on some positive and negative news of SREITs
- Fundamental investment guidelines
- Common metrics to look out for
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