Singapore REITs - UOB Kay Hian 2023-01-14: Gradual Easing Of Inflation Positive For S-REITs

Singapore REITs - Gradual Easing Of Inflation Positive For S-REITs

Singapore REITs - UOB Kay Hian Research | SGinvestors.ioCAPITALAND ASCOTT TRUST (SGX:HMN)

Higher terminal Fed Funds Rate.

  • Fed chairman Jerome Powell has warned that the Fed has “some ways to go” in its efforts to tame inflation. He cautioned that the terminal level (peak) of interest rates could be higher than previously anticipated. The Fed raised the target for Fed Funds Rate by 50bp to 4.25% on 14 Dec 22. Based on the Fed’s dot plot, the median projection for Fed Funds Rate is 5.1% by end-23, an increase of 50bp compared to the previous survey conducted in Sep 22.
  • We expect the Fed to hike 50bp on 1 Feb 23 and taper to a 25bp hike on 22 Mar 23. The Fed Funds Rate should reach a peak of 5.0% by mid-23 (previous: 4.5%) and remain at elevated levels in 2H23.

Inflation has eased for two consecutive months.

  • US CPI has eased for two consecutive months by 0.5ppt in Oct 22 and 0.6ppt in Nov 22. The latest reading for CPI of 7.1% is much lower compared to the peak of 9.1% in Jun 22. The sequential m-o-m momentum has also moderated to 0.1% in Nov 22 compared to 0.4% in Oct 22.
  • The biggest contributor to the slowdown was energy, which declined 1.6% m-o-m (gasoline: -2.0% m-o-m, electricity: - 0.2% m-o-m and piped gas: -3.5% m-o-m). Used cars and medical care also dropped 2.9% and 0.7% m-o-m respectively.

Lower government bond yield.

  • We attribute the slower inflation to easing of supply chain disruptions as economies reopened after weathering the wave of Omicron variant infections in early-22.
  • We expect inflation in the US to have already peaked in Sep 22 and would continue easing gradually in 1H23. In response to the lower inflation, 10-year Singapore government bond yield has eased 40bp to 3.08% in 4Q22.


  • The Fed expects core PCE inflation to recede gradually to 3.5% in 2023 and 2.5% in 2024. Based on the Fed’s dot plot, the Fed Funds Rate would be cut by 100bp to 4.1% in 2024. Thus, S-REITs have to weather higher interest rates in 2023 before the pressure eases in 2024.
  • The sector provides attractive distribution yield of 5.97%, which is 1.1 standard deviation above long-term mean. Downside is limited to a correction of 8.4% if distribution yield spikes to 2 standard deviation above mean at 6.52%.

S-REITs weathering headwinds from higher interest rates.

Sector Catalysts:

  • Hospitality, retail and office REITs benefitting from reopening and easing of COVID-19 restrictions in Singapore and around the region.
  • Limited new supply for logistics, office and retail segments in Singapore.

Sector Risks:

  • Escalation of the Russia-Ukraine war beyond Ukraine.

Jonathan KOH CFA UOB Kay Hian Research | 2023-01-09

More views on outlook of Singapore REIT (S-REIT) sector:
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