US markets fell off a cliff yesterday after the Fed cut rates the day before. Today, the SGX continued its fall, although not as bad as Monday. S-REITs continued to be the most affected as index/mutual funds face further redemptions.
As S-REITs fall and their forward yields rise, I believe there will come a point where investors find that yields are just too attractive to stay away from. Multiple REITs like ESR and Cache have hit double digit yields while bigger cap names like AREIT and CMT trade above 6%. On the one hand, it is natural for investors to build in some sort of risk premium to compensate for the added volatility in prices but this seems somewhat over done in my opinion as interest rates have just been cut twice.
In terms of picks, investors should prefer names with strong management and parentage (Ie. Capitaland, Mapletree, Frasers, Keppel) with the institutional knowledge and experience to weather this crisis. While such names are also highly exposed to institutional fund outflows during this period, this also represents buying opportunity for retail investors and funds that have not been facing redemptions. Also prefer to go with REITs that have long WALE and built-in escalations; industrial REITs reflect such characteristics which could also be why they remain the only sub-sector to be trading above 1.0x P/B.
On a broader note, stepping away from REITs, the increased trading volume in recent weeks could be a boon for brokerages and the SGX in the short run. However in the long run, the volatility could turn away many risk-averse retail investors. Smaller institutional funds could also be affected if the fund redemptions drag on and the fund is unable to collect sufficient management fees to turn a profit. The lower prices could also accelerate the pace of privatizations and share buybacks on the SGX thereby reducing the total market free float. A lower market free float in turn reduces future trading activity on the bourse.
