DBS Group Research analysts Geraldine Wong and Derek Tan are indicating their preference for higher yielding Singapore REIT (S-REIT) plays and inflation-hedged REITs as the US Federal Reserve (US Fed) reiterates its hawkish stance.
“Winning sectors for the quarter included the hospitality sector, which rose 0.2% m-o-m, followed by the European office sector (-1.8% m-o-m) and US hospitality sector (-2.1% m-o-m),” the analysts note in their Sept 5 report.
In August, the Singapore REITs Index (FSTREI) declined by 4.6% m-o-m, underperforming the benchmark Straits Times Index (STI), which rose 0.3% m-o-m in the same month. The decline came mainly after Fed chairman Jerome Powell repeated his hawkish stance during the annual central bank symposium at Jackson Hole towards the end of August, in a bid to reduce inflation rates back to below 2%.
The latest US inflation rate in July stood at 8.5%, easing slightly from June’s 9.1%, but still hovering near a 40-year high.
As contributors of inflation including heightened energy costs and labour shortages continue to persist albeit with a slight moderation in the most recent months, interest rate futures are pricing in the market expectation that policy rates would reach the 3.75%-4.00% range by next March.
A third 75 basis point (bps) hike in the US Fed’s September policy meeting is also likely.
Following the more hawkish interest rate forecast, sell-offs were seen across all sectors, although Wong and Tan note that there was a sectorial preference towards sectors with inflation hedges in places. Inflation hedges include rents tagged to consumer price indices (CPIs) such as the European office sector, or the US hospitality sector, where rents are based on dynamic room pricing.
To be sure, top performers for the month of August include Cromwell European REIT, which rose 3.0% m-o-m; EC World REIT, which rose 2.8% m-o-m; and Sabana REIT, which rose 1.1% m-o-m.
“The majority of Cromwell European REIT’s leases are on annual escalations tagged to the CPI, and the REIT offers a compelling forward yield of 8%,” Wong and Tan write.
“EC World REIT and Sabana REIT also feature strongly among the highest yielding industrial stocks. EC World REIT delivers a compelling double-digit 12%-13% forward FY2022/FY2023 dividend yield, while Sabana REIT delivers a forward yield for FY2022/2023 of 7.6%-7.8%,” they add.
As at 11.24am, units in Cromwell European REIT, EC World REIT and Sabana REIT are trading at EUR1.99, 54.5 cents and 44.5 cents respectively.