Sunday, March 3, 2019

S-REITs Jan-Feb 2019 Review


S-REITs have been on tear this year, outperforming the broader market by a wide margin. Economic and market conditions have been optimal for a REIT rally. These conditions include falling bond yields due to expectations of looser monetary policy by major central banks as compared to the last 2 years. Also, a weaker economic outlook, but not quite a recession, means that growth stocks which were in vogue over the last few years, have lost their shine. 

Instead, institutional investors have turned their attention to dividend stocks, since they anticipate lower capital gains from growth stocks. Also, appetite among global investors for Asian equities have returned in a very strong manner. These factors have been the driving force behind the stampede into S-REITs this year.

So how have S-REITs stacked up so far? 

The table below shows the total returns of the S-REIT sector for the first two months of the year. While no sub-sector has outperformed in particular, the Industrials have underperformed, despite their higher yields. This is likely due to the still-pessimistic outlook for this sub-sector, more so if economic growth worsens.

The higher beta REITs have outperformed, though they were also the most battered in the sell-off last year. In the top 10, the only REITs with a majority of assets based in Singapore is CapitaLand Commercial Trust and to a lesser extent, Keppel DC REIT. The other REITs are 100% offshore assets, with the exception of Ascendas Hospitality Trust holding a single Singaporean asset.

Also, the China plays have been stellar as a resolution on the trade war looks increasingly likely, notably Sasseur REIT (19.2%), Mapletree North Asia Commercial Trust (11.4%), CapitaRetail China Trust (11.0%) and EC World REIT (10.1%). I expect the Chinese REITs to continue to outperform should a trade deal materialise. This is largely due to aggressive monetary and fiscal policy stimulus that the government unleashed in late 2018. As government policies tend to take a few months to kick in, the Chinese economy will rebound as early as the 2nd Quarter of 2019.

Where do we go from here?

Any further rally in the REIT sector as a whole will hinge on Federal Reserve policy changes over the next few months. If the Federal Reserve does indeed pause its rate hikes for good and ends it balance sheet reduction (read 'money destruction'), we can expect bond yields to head lower once more and the S-REIT rally to resume. But for now, I believe that the rally is done, though I expect prices to move sideways, or even undergo a minor correction, pending further development from the Federal Reserve. 

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