Singapore REITs - DBS Research 2023-07-12: Enduring A “Red Hot” Summer

• While we remain constructive on S-REITs as we approach the end of the rate hike cycle, we believe that all are not totally “out of the woods” yet, as near-term funding costs (3-month SORA, 3-year/5-year swap rates) are likely to remain elevated over an extended period before entering a period of normalisation from 2H24 onwards. This means that S-REITs will still feel the erosion of distributions as average portfolio interest rates inch higher in 2024.
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What if red-hot interest rates remain?

• The peak of interest rates has been the key datapoint we have been tracking for 2023, but the turn has eluded us, as of Jul 23. While we have seen periods of a near-term retreat in interest rates, as of July 23, short-term interest rates (namely the-month SORA, 3-year/5-year swap rates) have rebounded to near year-to-date highs, at around the ~3.6% level.
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• While we are at the end of the current rate hike cycle, which is overall positive for the S-REITs, given improved funding cost visibility, the key question remains: How long will the currently high interest rates remain before normalising to a more comfortable 2.5%-3.0% level, which is a more conducive environment for growth?
• While the timing of such cuts is uncertain, DBS economists believe that 2H24 will be when the Fed would look at cutting interest rates after the cooling off period for the economy and inflation has passed. We have baked in 100 basis points in cuts to the Fed Funds Rate from 3Q24 to 4Q24. The short-end rates, however, are forecast to dip but remain elevated. Based on DBS’s forecasts, the current 3-month SORA of 3.6% will dip to about ~3.0% by the end of 2024.
• While the interest rate hikes are expected to end, interest rates are likely to remain high over an extended period. With that in mind, we cast our eye on our FY24F dividend per unit (DPU) forecasts to see if there are risks to our current estimates if interest rates remain elevated.

Are we ready for “higher for longer?”

Refinancing costs to continue inching higher, but peak increase in rates is likely over.

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Derek TAN DBS Group Research | Rachel TAN DBS Research | Dale LAI DBS Research | https://www.dbs.com/insightsdirect/ 2023-07-12 SGinvestors.io

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