High benchmark yields a near-term headwind for the S-REITs, but valuations (P/B below -1 standard deviation) imply that it is time to add selectively. Positives from recent management meetings reinforce our stance that retail, industrials remain most resilient; hotels’ growth trajectory remains on an uptrend.
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Not time to be negative as rates peak.
The recent hawkish stance by Federal Reserve Department (Fed) Chair Jerome Powell, while having expectedly skipped a rate hike in Sept 23, leaving interest rates at the current 5.25% to 5.50% range, has now signalled a strict policy path into 2024 as the US economy has remained more resilient with steady job growth numbers. 10-year bond yields have responded in kind, with the US two-year yield crossing 5% and the US 10-year yield now hovering around the 4.8% to 4.9% range in recent weeks.
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Overall, while the higher interest rate environment presents higher opportunity costs for investors when investing in yield instruments (i.e. REITs, bonds, etc.), we believe that during a peak (or peaking rates), it is not advisable to turn bearish but rather seek out opportunities in the currently volatile trading environment.
The Singapore REITs sector is currently trading at FY24F yield and a P/B valuation of 0.83x, which is attractive.
S-REITs’ prices remain weak in Oct 23.
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Above is an excerpt from a report by DBS Group Research. Clients of DBS may access the full PDF report @ https://www.dbs.com/insightsdirect/.