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Singapore REITs - OCBC Investment 2021-03-10: Volatility Expected Given Bond Yields Spike

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Singapore REITs - Volatility Expected Given Bond Yields Spike




Low correlation between S-REITs’ share price performance and Singapore government 10-year bond yield, but sudden spikes can bring about volatility

  • The S-REITs sector has come under some selling pressure in recent weeks given the sudden and sharp spike in the 10-year US Treasury yield and 10-year Singapore government bond yield, which have jumped 62 and 71 basis points year-to-date, respectively. This leaves us more cautious on the sector in the near-term as sentiment over yield sensitive instruments weakens and we expect further volatility in the months ahead.
  • From a valuation perspective, a spike in sovereign bond yields can also compress the distribution yield spread between the S-REITs sector against the 10-year Singapore government bond yield, thus making valuations look less attractive.
  • That said, based on historical data points, the correlation between the proportionate performance of the FTSE Straits Times REIT Index (FSTREI) and change in 10-year Singapore government bond yield was low at only 0.08 from the period between the start of 2004 to 5 Mar 2021. See chart in report attached below. If we take this analysis deeper by exploring the rolling 12-month correlation between these two variables, we note that the correlation was largely positive (i.e. FSTREI was appreciating when bond yields were rising and vice-versa) from the start of 2004 to mid-2013. Thereafter, we saw more episodes of the correlation being in negative territory.
    • For example, the Bernanke taper tantrum in May 2013 resulted in a sharp spike in bond yields, with the 10-year Singapore government bond yield rocketing from 1.6% (22 May) to 2.8% (24 Jun) and the FSTREI dipped 17.7% during this span of one month. It subsequently corrected by another 4.6%, troughing in early Feb 2014 before rebounding 16.2% over the next 12 months as bond yields stabilised and the US GDP growth gathered momentum.
  • Other episodes when bond yields spiked and the rolling 12-month correlation between the FSTREI and 10-year Singapore government bond yield was in negative territory are detailed in Exhibit 3 of report attached below. Currently, the 10-year Singapore government bond yield has risen 71 basis points year-to-date, while the FSTREI is down 4.0%, with the rolling 12-month correlation still in slight positive territory (0.13).
  • We conclude that there has historically not been a clear correlation between the FSTREI and 10-year Singapore government bond yield. However, a sudden and sharp spike in bond yields can cause an initial negative knee-jerk reaction in the share prices of S-REITs. In the past 3 episodes when this happened since 2013, we have subsequently seen a 15% to 21% rebound in the sector from the trough over a 12-month period once bond yields stabilise. Hence, although the sudden surge in bond yields this year is a concern, investors should also focus on the underlying drivers such as a stronger economic outlook, which would support the recovery of the operational performance of S-REITs and drive a potential sector re-rating.


Forward distribution yield spread has compressed to below 10-year average levels

  • In terms of valuations, given the spike in bond yields, the current forward yield spread between the FSTREI and the 10-year Singapore government bond yield has now compressed to 395 basis points, which is 57 basis points below the start of the year and also approximately 0.4 standard deviations below the 10-year average of 420 basis points. Valuations for the sector are no longer as appealing as compared to six months ago, and we would be cautious over the near-term as volatility is likely to stay and there could be further selling pressure.
  • Our house projections for the 10-year US Treasury yield over the next 12 months was recently raised from 1.5% to 1.9%, and we note that the correlation between the 10-year US Treasury yield and 10-year Singapore government bond yield has historically been high.
  • That said, we believe a firm economic recovery from the pandemic can help to buttress the underlying operational improvement of S-REITs, and this should help to drive a re-rating over the medium to longer term, even as bond yields trend upwards (assuming that the increase is not as sharp as what we have seen in recent weeks).
  • For investors looking for exposure to the sector, we would position with a recovery basket comprising retail and hospitality REITs given that we have already seen a more meaningful rotation to value and cyclical stocks globally:
  • For investors with a longer-term horizon, we would be buyers on dips of high-quality S-REITs which are expected to be beneficiaries of secular growth trends with room for solid inorganic growth opportunities. Preferred picks within what we term as our resilient basket of S-REITs would be:
  • Over the next 9-12 months horizon, we would expect our recovery basket to outperform our resilient basket.

S-REITs' 4Q20/2H20 results an affirmation that gradual recovery is on track

  • Looking back at the recently concluded 4Q20/2H20 earnings season, there were 15 S-REITs under our coverage which reported DPU figures (others only provided operational updates).
    • 8 of them reported results which met our expectations,
    • 3 of them exceeded our expectations, and
    • the remaining 4 fell short.
  • Although y-o-y DPU growth was -14.4% for these 15 S-REITs, or -7.0% on a market-cap weighted basis, given that results were largely in-line with our expectations, we believe this is an affirmation that the gradual recovery from the COVID-19 pandemic is on track. See summary table in report attached below.





OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-03-10
SGX Stock Analyst Report BUY MAINTAIN BUY 1.240 SAME 1.240
BUY MAINTAIN BUY 1.580 SAME 1.580
BUY UPGRADE HOLD 2.180 SAME 2.180
BUY MAINTAIN BUY 2.950 SAME 2.950
BUY MAINTAIN BUY 1.06 UP 1.040


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