S-REITs: Are we finally seeing a turnaround?

Dovish Fed paves the way for optimism

Within the Straits Times Index (STI), property counters and S-REITs are seeing broad gains in today’s session, coming off the dovish tone from Federal Reserve (Fed) Chair Jerome Powell at Jackson Hole. In the lead-up to the economic symposium, markets have already been fully priced for at least a 25 basis point (bp) rate cut in September, but getting the confirmation from the horse’s mouth offered a renewed sense of reassurances for markets.

From the symposium, the balance of risks for the Fed has clearly shifted away from inflation towards growth. The Fed will now be headed for rescue mode, with a strong message that they “do not seek or welcome further cooling in labour market conditions”.

What’s next?

With a policy pivot now on the horizon, the key question will be how much and how quickly the Fed will ease. To be aligned with the Fed will leave data-dependency as the answer for now, with a series of inflation data and all-important US non-farm payroll early next month on watch to guide the debate.

Fed rate expectations are now rooting for a 25 bp cut in September with a 62% probability, while 38% odds are priced for a larger 50 bp move. Markets continue to expect back-to-back cuts through March 2025. If further validated by softer economic data, implications could be further downside risks to bond yields, which may generally make S-REITs more attractive for investors.

Are we finally seeing a turnaround for S-REITs?

The iEdge S-REIT index has gained as much as 6.8% over the past two weeks, but despite so, it continues to trail the broader STI by a significant margin. Over the past five years, the broader index returns 9.0%, while the S-REIT sector is still hovering around Covid-19 levels with a 24.4% dip in the red.

That said, the lagging performance may potentially offer room for some catch-up in the sector, especially as the sector’s yield spread with Singapore’s 10-year government bond yields remained below its 10-year historical average. Valuation from a price-to-book perspective remains attractive as well, with the FTSE ST REIT index price-to-book ratio likewise trading more than one standard deviation below its 10-year historical average.

Breakdown of STI S-REIT constituents

The dividend yield for STI S-REIT constituents currently stands between 5.1%-6.7%, which is similar to what the local banks are offering (DBS 5.6%, OCBC 6.0%, UOB 5.6%). That may explain the outperformance in the banking sector over the past years, which offer an attractive mix of income (dividends) and growth (businesses’ acquisitions).

But as banks’ earnings are likely to see a peak with upcoming rate cuts, whether more traction will shift towards the REIT sector will be a theme to watch ahead. This is given the view that rate cuts generally translate to lower borrowing costs, which may be positive for REITs’ profitability given their businesses’ reliance on debt, while their property valuation may also be well-supported with lower rates.

Technical view

The iEdge S-REIT Index has registered a new six-month high in today’s session, as buyers take greater control with the formation of a new higher high. Positive momentum has been building as its daily relative strength index (RSI) defended the mid-line back in early-August this year, while daily moving average convergence/divergence (MACD) head higher into positive territory. A move above an immediate downward trendline resistance may be on watch, with any success in overcoming the near-term resistance potentially paving the way for the index to retest its year-to-date high.