Singapore REITs and hospitality trusts have suffered heavy price corrections in the past 5 trading days (22 Sep to 28 Sep).
The selldown affects the whole industry and not specific to any REIT.
15 of them were down 10% or more:
These price decline in 5 days were more than what most of their annual dividends could cover.
The natural thing for investors is to figure out what’s driving this selldown and determine if there is any buying opportunity.
The key driver here is the expectation of interest rate hikes.
It is likely the case because it was 21 Sep 2022 when the Fed last raised the interest rate and the following day was the start of the selldown.
We previously explained that it wasn’t the rate hike itself but the expectation of higher hikes till end of 2023 that was causing the ruckus in the markets.
REITs are impacted by interest rates in three ways.
First is that REITs take leverage to own properties and higher rates mean higher financing costs, thereby reducing the distributable income to unitholders.
Second is that investors are starting to compare alternative yielding assets as rates become more attractive.
The Singapore Government 5y Bond hit 3.48% yield on 28 Sep 2022. Fixed deposits are offering more than 3% too.
Investors would start to think if a REIT yielding at 4-5% is still worth the risk? Considering the risk free rate is expected to go up even more, investors would demand much higher yields from REITs, so prices have to fall.
Third, some investors might have been taking leverage to buy REITs. The interest rates on the margin trading have been climbing too. Imagine paying 4-5% interest to buy a 5% dividend yielding REIT, it makes very little financial sense.
This may have prompted investors to deleverage and trigger an outflow of capital from REITs.
Is this an opportunity to buy? It depends.
We think that those that are giving yields around 4-5% may have room to fall further as the risk free rate is expected to rise closer to that level. REITs have to trade lower to increase their yields as commensurate with their risks.
There will be a time where the yields become attractive enough for investors to buy these REITs.
At the moment, there are 8 REITs/trusts trading at more than 10% dividend yield may have a bigger buffer from the rising risk free rate.
Interestingly they are all overseas REITs. Besides forex risks, each jurisdiction may come with their unique issues – for e.g. Dasin Retail Tr is dealing with lockdowns in China while ManulifeReit facing lower demand due to the work from home trend.
More analyses have to be done in order to pick a REIT that can at least sustain its dividends going forward. If so, locking in at 10+% dividend yield for many years can make a good investment, even in a higher interest rate environment.
