SGX Market Updates

Quick Takes on the Fed’s 50bps Cut From Our REIT ETF Issuers

SGX
Publish date: Tue, 08 Oct 2024, 01:04 PM

Following recent softening in jobs data and inflation, the US Federal Reserve made its first rate cut in four years, lowering the overnight borrowing rate by 50 basis points to a range of 4.75% to 5%. The Fed plans further cuts – another 50 basis points this year, a full percentage point in 2025, and half a point in 2026. However, it has increased its long-term rate projection to 2.9%, up from 2.8%, and much higher than December 2023's 2.5%.

Here’s what our REIT ETF Issuers have to say about the rate cut and how it’ll impact the REITs sector:

CSOP Asset Management’s Head of Fixed Income, Bruce Zhang:

  • “As the US Fed implemented a 50-basis point cut in September, with the market anticipating further cuts for the remainder of the year and a cutting cycle extending until 2026, yield-sensitive securities like S-REITs are projected to continue benefiting from this trend, even in the wake of the recent price rally.
  • From a macroeconomic perspective, the gradual recovery of external-led manufacturing and trade-related services should continue to bolster the Singaporean economy, and by extension, S-REITs. Concurrently, easing inflation due to cooling labour cost growth and contained input costs is reducing the burden on S-REITs. Additionally, the dilution of offshore earnings from a strong SGD should begin to dissipate following the Fed's rate cuts.
  • By sector, industrial, office, and retail REITs all exhibit a relatively balanced net supply and demand, which could support decent rental reversions. As for more cyclical sectors like retail and hotel REITs, they demonstrate overall resilience, with hotel REITs' RevPAR expected to be bolstered by returning tourists after previously peaking.
  • In summary, it appears that most of the headwinds that previously hindered S-REITs, a strong SGD, high inflation, cost pressures, and monetary tightening, have now dissipated. When combined with a still decent yield (approximately 5.7%) and a reasonable spread (around 3.1%), we believe that S-REITs still have potential for further rally and to catch up with their global counterparts, given their relatively attractive yield spread.”

Lion Global Investors’s ETF Business Lead, Ong Xun Xiang:

  • “With the US Fed starting the rate cut cycle from September, we believe S-REITs will benefit from lower borrowing costs, increasing their profits and distributable income. 
  • Lower interest rates will also provide cheaper debt for high-quality S-REITs to make more accretive acquisitions and further grow their top line.”

Phillip Capital’s Deputy Chief CIO, Tan Teck Leng:

  • “While the interest rate cut by the US Fed took longer than expected to arrive, the cycle has started with a bang. REITs as an asset class are poised to benefit given that they are seen as rate-sensitive investments.
  • REITs’ profits will benefit directly from lower borrowing costs (while the effects will be staggered over a period), and their comparative yield attractiveness will become more apparent versus the yields of instruments such as government bonds and fixed deposits whose rates look set to drop. We think market interest is likely to be sustained as a result.”

Straits Investment Management’s CEO, Manish Bhargava:

  • "Following the cut in September, the US Fed continues to signal the potential for further rate cuts in the future. This declining interest rate environment is set to benefit REITs, with distribution per unit (DPU) growth projected to recover starting in 2025.
  • We anticipate a cumulative Fed rate cut of around 200 basis points by the end of 2025. Key drivers of REITs' performance include an expanding yield spread, potential earnings growth from lower financing costs, and strengthened balance sheets supported by stabilising asset values and ongoing deleveraging efforts.
  • Overall, we maintain a positive outlook for REITs, underpinned by improving fundamentals and a favourable macroeconomic environment."

UOB Asset Management’s Head of Sustainability Office, Victor Wong:

  • "The recent rally signals promising signs of a sector valuation re-rating and could mark an inflection point for the REITs market. 
  • With cheaper financing costs on the way, we expect to see significantly improved property fundamentals, rental income and earnings growth.
  • However, these conditions are even more positive for sustainability-focused real estate projects, and will provide a good tailwind for the green REITs market. Geographically, we favour the Australia and Singapore markets.”

REIT ETFs in Singapore reach historic AUM highs with growing investor appetite

Investing in ETFs has become increasingly popular as it provides instant diversification into a basket of securities, transparency and tradability, as well as lower fees and transaction costs. The ETF industry in Asia-Pacific ex-Japan saw AUM grow 35% year-on-year to over US$780 trillion by end 2023. In Singapore, retail and institutional clients’ ETF AUM has also almost doubled in the past four years.

Since the debut of REIT ETFs in 2016, REIT ETFs have become a key building block for investors in Singapore. Their combined AUM reached a new record of S$1 billion as at 30 September 2024.

Across the 5 REIT ETFs, retail investors, including those invested using their SRS and CPF monies, accounted for 62% while institutions accounted for 26%, and digital platforms that include regular shares savings and robo advisors accounted for 12%. 

Reit market update

REIT ETFs’ daily turnover over the past 3Q24 has reached S$4.2 million, which is up almost 45% from 1H24, and up 173% from 2023. Inflows to the two pure S-REIT ETFs – CSOP iEdge S-REIT Leaders Index ETF and Lion-Phillip S-REIT ETF – in the first 3 quarters of 2024 has crossed S$145 million, highest since 2021 when S$168 million was recorded that year.

Reit market update

Further Resources and Research: 

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