Saved by the Fed as the rate hike cycle ends
The consensus view is increasingly pointing to the end of the US Federal Reserve’s interest rate hike cycle as inflationary pressures recede. But, rates are ending at a 15-year high, with the Federal Funds Rate at 5.25%–5.5%.
Before REIT investors cheer, S-REITs will have to grapple with higher debt costs for some time as rates are unlikely to fall till at least the second half of next year if at all. However, risk-free rates as represented by the yield on the 10year US treasuries (UST10Y) and the yield on the 10-year Singapore Government Securities have come off decade-highs. The UST10Y rose to a slither beneath 5% but has since retreated to 4.45%.
The decline in the UST10Y means that REIT prices are likely to rise to offset the compression in REIT yield and maintain the yield spread between REIT yields and those of 10-year government bonds.
The initial rebound in S-REITs, as represented by the CSOP iEDGE S-REIT Leaders Index, which reflects the performance of the iEdge
S-REIT Leaders Index, may fizzle out as prices approach a resistance area that coincides with the declining 100-day moving average at the 79 cents to 80 cents range. By then short-term indicators may be approaching the top end of their range.
The iEdge S-REIT Leaders Index is the most liquid representation of the S-REIT market in Singapore. It is an adjusted free-float market capitalisation-weighted index that measures the performance of the largest and most tradable REITs in Singapore. These include CapitaLand Integrated Commercial Trust, CapitaLand Ascendas REIT, Mapletree Logistics Trust, Mapletree Industrial Trust, Mapletree Pan Asia Commercial
Trust, Keppel REIT, Suntec REIT and CapitaLand Ascott Trust.
Although almost all the S-REITs retreated for the first nine months of this year, the US S-REITs which fell the most have also rebounded significantly. Their short-term indicators are somewhat overstretched and the US S-REITs may ease.
Frasers Property (FPL) has gained strength relative to other developers such as City Developments, UOL Group, and Ho Bee Land. It has rebounded almost 11% in five trading sessions. The rebound has taken prices towards the top of what could turn out to be a major double-bottom formation, with the neckline-breakout level at 84.5 cents.
The rebound materialised despite the announcement of a net loss recorded in 2HFY2023 ended September on the back of revaluation losses in its investment property portfolio in the UK, Europe and Australia.
On the positive front, FPL raised its dividends by 50% despite its FY2023 net profit declining by 81.3% to $173.1 million. Even after the rebound, FPL continues to trade at just 0.33 times its net asset value of $2.52. The NAV itself fell 4.5% y-o-y. Like most developers, FPL trades at a large discount to NAV. This is due to an illiquid balance sheet that is asset-heavy.
One way to have a more liquid balance sheet could be to place development projects in funds or joint ventures with other capital partners, thereby freeing up capital to return to shareholders. According to its FY2023 presentation, 89% of FPL’s assets of $34.2 billion are in investment properties. These are likely to continue to be a drag on the stock’s P/NAV valuation.
During its results briefing, group CEO Panote Sirivadhanabhakdi said that divesting assets is an option to narrow the gap between share price and NAV.
Technically, a break above 84.5 cents would indicate an upside of 95 cents, which is still a hefty discount to NAV. At present, analysts and market watchers do not expect a trigger for share prices to rally further.