S-REITs Reach a "Long-Awaited Turning Point" Amid Calls for Fed Rate Cuts

Moomoo News SG joined discussion · Aug 27, 2024 16:37

As Federal Reserve Chairman Powell gave the clearest signal yet of a potential rate cut last Friday, the market has fully priced in the possibility rate cut in September. The recent report by OCBC Investment Research (OIR) pointed out that the Singapore Real Estate Investment Trust(S-REIT) sector, which was once significantly impacted by the COVID-19 pandemic, high inflation, and high interest rates, stands to benefit from this development.

In the past eight weeks, institutional and retail net flows for the first half of 2024 reversed by approximately 10%. The trading volume of REIT ETFs has also risen: on October 20, 2016, the first REIT-tracking ETFs debuted in Singapore. Last week, their combined assets under management hit a new high of SGD 917 million. Since the end of June, their daily turnover has reached SGD 4.6 million, representing nearly a 60% increase from the first half of 2024 and a 200% increase from 2023.

OIR states that S-REITs are at a "long-awaited inflection point."

Notwithstanding limited historical data for S-REITs, the sector’s share price performance is dependent, in our view, on the driver and rationale behind rate cuts by the Federal Reserve (Fed)," the team writes in its August 23 report.

The SGX report also highlighted the potential correlation between S-REITs and interest rate cuts. It mentioned that the change in sentiment has been driven by the growing certainty of a Fed Funds Rate cut at the September 18 FOMC meeting.

The iEdge S-REIT Index saw a total return decline of 11% in the first half of 2024, but achieved a 10% total return in the first eight weeks of the second half of 2024.

The iEdge S-REIT Index's recent correlation with the direction of US-listed Federal Funds futures is shown below.

S-REITs Reach a "Long-Awaited Turning Point" Amid Calls for Fed Rate Cuts

What's next?

As the policy shift approaches, the key questions will be how much the Fed will ease policy and how quickly it will do so. IG Market Strategist Yeap Jun Rong suggests that the current answer will be data-dependent, and investors should focus on a series of inflation data and the crucial US non-farm payroll data early next month.

SGX Market Strategist Geoff Howie also noted, "Further rate cuts post-September will be data-dependent, thus the renewed optimism remains cautious."

Which S-REITs Might Benefit the Most from Potential Rate Cuts?

Investors are closely watching to see which S-REITs might benefit the most from the anticipated interest rate cuts.

DBS Bank indicates that prolonged rate cuts will have a more significant impact on REITs with over 20% of their loans unhedged. The bank identifies City Developments Limited Hospitality Trust (CDLHT) and Far East Hospitality Trust (FEHT) as the biggest beneficiaries of the rate cuts, along with Suntec REIT (SUN), OUE Commercial REIT (OUECT), and Lendlease Global Commercial REIT (LREIT), which have only 50-60% of their loans hedged to fixed rates.

By sector, DBS Bank notes that the retail sector is most likely to benefit from the expected rate cuts from the fourth quarter of 2024 to 2025, followed by the industrial, hospitality, and office sectors, given their income elasticity. The growth momentum in the retail, office, and warehouse sectors is expected to remain strong in the second half of the year.

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