The US Federal Reserve plans to taper in 2022 and then after much soul searching indicated that the Federal Funds Rate and hence interest rates in general could rise by the end of 2022.
Inflation — caused by a de-synchronised supply chain — is already present in the global economy. Inflation in general, is good for property prices and rents. Case in point: as inflation has crept into the Singapore system through higher electricity and food prices, property prices have firmed.
“Strong DPU recovery could help to offset higher [interest] rates and retail REITs such as CapitaLand Integrated Commercial Trust and Frasers Centrepoint Trust are expected to see DPU growth of 12% to13% in FY2022. This should be achievable as we estimate that 80-94% of the growth is driven by the removal of rebates and completion of AEIs and acquisitions,” Credit Suisse observes.
Chart 1 shows the performance of the FTSE REIT Index and the 10- year Singapore Government Bond (not the yield). How the REITs respond to a fall in the bond market has become diffused since the start of the pandemic.
In the years from 2011 to early 2020, the FTSE REIT Index and the 10-year Singapore Government Bond price were inversely proportional. Following the start of the pandemic, both have moved more or less in tandem. Now, though, they appear to be once again on their inversely proportional path, with the 10-year bond rising and the FTSE REIT Index falling.
Although REIT unit prices are likely to fall initially with the Fed’s tapering, the inflationary environment could cause some REITs to rebound swiftly or escape the taper tantrum altogether.
Credit Suisse goes on to note that structural tailwinds for logistics assets and data centres should keep industrial REIT yields tighter than peers. “However, sustaining superior inorganic growth is also key to supporting valuations. We prefer exposure to the recovery through cheaper retail REITs such as CapitaLand Integrated Commercial Trust and Frasers Centrepoint Trust.”
Keppel DC REIT was one of last year’s top performers but is now one of this year’s worst performers. Based on its chart pattern alone, there isn’t much to commend it to traders. Keppel DC REIT’s unit price is approaching a one-year low of $2.45. This level should provide some support. However, indicators remain weak. Technically, prices could break down. In this event, a downside of $2.26 is indicated, a level that represents support.
The 2020 pandemic low for Keppel DC REIT was $1.76 but that is unlikely to be attained. Prices need to rise above the declining 50- and 100-day moving averages at $2.55 and $2.56 to escape the doldrums. The cause of the Keppel DC REIT’s weakness could be partly due to its joint-venture with M1, and partly due to an acquisition in China which investors have been lukewarm about.