S-REITs Post Record Quarter Since 2020: What's Next?

Top3 leading S-REITs in the iEdge S-REIT Index in the third quarter were all US office S-REITs. Derek Tan, head of regional property research at DBS Bank, indicated thatcommercial real estate investment trusts, including office REITs, could potentially become the "dark horse" next year, as concerns over their relatively high leverage have eased with the expectation of interest rate cuts.

Other trusts with overseas assets also performed well, with Capitaland China Trust and United Hampshire REIT increasing by 27.6% and 24.1%, respectively. Singapore REITs holding office assets also showed strong performance, with Suntec REIT rising by 26.7% and OUE Reit increasing by 23.1%.

1) Real estate is a highly interest-rate-sensitive sector, and bank borrowing is a significant component of capital management for REITs. With interest rate cuts, borrowing costs for REITs decrease. Additionally, rising property valuations may further enhance the net asset values of these trusts, encouraging more investment flows.

2) High-dividend REITs attract investor interest in an environment of anticipated interest rate cuts and market volatility due to their ability to provide stable cash flows. Adopting a high dividend strategy can offer investors a relatively stable income source and some protection against market fluctuations. Generally, according to Singapore regulations, REITs must distribute at least 90% of their net profits to unitholders while maintaining leverage below 50%.

3) As economic activity and the tourism sector improve across the region, local retail and hotel REITs may see significant benefits, contributing to a broader index recovery.

The rebound in the third quarter of 2024 occurred against the backdrop of expectations for an interest rate cut by the Federal Reserve. On September 18, investors got their wish as the Federal Reserve lowered the federal funds rate by 50 basis points to a range of 4.75% to 5% and hinted at potential further cuts in the future.

Due to the significantly better-than-expected non-farm data, the U.S. added 254,000 jobs in September, far surpassing forecasts. Market expectations for rate cuts later this year have significantly narrowed. Analysts indicate that due to the strong non-farm data in September, the Federal Reserve may pause rate cuts in November. Both Bank of America and JPMorgan have adjusted their expectations for the Fed's November rate cut from 50 basis points to 25 basis points.

Contrary to Wall Street's mainstream view, Citigroup maintains a "dovish" forecast, claiming that seasonal adjustment issues have exaggerated the September non-farm data and that employment trends will see downward revisions in the coming months. This could lead the Federal Reserve to cut rates by 25 basis points in November, then return to a 50 basis point cut in December.

Mooers, do you believe the Singapore real estate market will continue to recover in this quarter? Please share your thoughts~