Singapore REITs - UOB Kay Hian 2021-08-27: QE Taper & Interest Rate Hikes – Feast Or Famine For S-REITs?

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Singapore REITs - QE Taper & Interest Rate Hikes – Feast Or Famine For S-REITs?

  • S-REITs might suffer a mild correction prior to the onset of QE taper but total return and relative performance should turn positive during the QE taper. S-REITs have provided positive total returns throughout the last two interest rate upcycles.
  • Whether S-REITs outperform the broader market depends on the magnitude and steepness of the hikes in the Fed Funds Rate. Given that the Delta variant remains a threat, the Fed is unlikely to go overboard to assert a hawkish stance.
  • Maintain OVERWEIGHT on S-REIT sector.



Comparing Global Financial Crisis (GFC) with COVID-19 pandemic.

  • The Fed has conducted quantitative easing (QE) twice:
    1. three rounds of QE, namely QE1, QE2 and QE3, which lasted from 2008 to 2013 during the aftermath of the Global Financial Crisis (GFC), and
    2. QE4 during the ongoing COVID-19 pandemic that started in Mar 20.
  • At its peak, QE3 involved the purchase of US$45b of treasury securities and US$40b of mortgage-back securities per month (total: US$85b/month). Comparatively, QE4 involved the purchase of US$40b of treasury securities and US$80b of mortgage-back securities per month (total: US$120b/month).
  • The size of the Fed’s balance sheet expanded by US$3.5t to peak at US$4.5t in 2H14 post-QE3 during the GFC. It expanded by a similar US$3.9t and stood at US$8.1t as of Jun 21. Thus, the scale of monetary stimulus is similar in size for the two crises.


Impact to S-REITs performance from QE tapering.

  • FTSE ST All-share REITs Index (FSTREI) incurred a negative total return of 3.3% during the three-month period before the commencement of QE1. S-REITs provided a positive total return of 16.1% and outperformed the MSCI Singapore by 9.7% during the process of tapering in 2H13 and 2014. S-REITs also provided a positive total return of 7% during the three -month period after the cessation of QE3. See the summary table in the report attached below.
  • Conclusion: Negative impact prior to commencement of QE taper. S-REITs could potentially suffer moderate negative total return prior to the onset of a QE taper in 2H21. However, there is no indication that S-REITs would incur negative total return or underperform the broader market during tapering and immediately after the tapering.


Impact to S-REITs performance from hikes in Fed Funds Rate.

  • S-REITs have weathered two episodes of interest rate upcycles. The Fed hiked Fed Funds Rate 13 times or a total of 4.25ppt to 5.25% during 2H04, 2005 and 1H06. The FSTREI provided positive total return of 12.6% during the three-month period before the commencement of the first hike. Total returns were positive at 25.8% during the 13 hikes in 2H04, 2005 and 1H06. Total return was also positive at 18.1% during the three-month period after the last hike.
  • The Fed hiked the Fed Funds Rate once by 25bp in Dec 15. It paused for a year due to the economic slowdown caused by weakness in business fixed investment in 2016. It subsequently restarted interest rate hikes again in Dec 16. In total, the Fed hiked the Fed Funds Rate nine times or a total of 2.25ppt to 2.5% during 2016, 2017 and 2018. The FSTREI provided a positive total return of 1.7% during the three-month period before the commencement of the first hike. Total returns were positive at 11.9% for 2016 and 24.1% for 2017-18 during the series of interest rate hikes. Total return was also positive at 8.6% during the three-month period after the last hike. See the summary table in the report attached below.
  • Conclusion: Buoyant economic activities positive for both GDP growth and S-REITs. The Fed typically hikes the Fed Funds Rate when economic growth is robust to avert overheating and build-up of inflationary pressure. This scenario is usually conducive for growth in rentals and capital values for real estate. Thus, it should not come as a surprise that the total return for S-REITs was positive during the past two interest rate upcycles, including the three-month period before the first hike and three-month period after the last hike.
  • S-REITs outperformed the MSCI Singapore by an average of 6.9% in the three months before the first hike in Fed Funds Rate, and 5.4% in the three months after the last hike in Fed Funds Rate. S-REITs’ relative performance during interest rate hikes are mixed. They underperformed during 2H04, 2005 and 1H06 (13 hikes over two years and steeper 33bp per hike on average) but outperformed during 2016-18 (nine hikes over three years and milder 25bp per hike on average). Nevertheless, their total returns were positive throughout both cycles.


The Fed could push for an earlier start for QE taper.

  • The GFC was followed by a seven-year period of zero interest rates. We previously expect the runway for zero interest to be shorter at just three years for the COVID-19 pandemic. We had envisaged the Fed to embark on tapering its bond purchase programme in 2022, paving the way for potential interest rate hikes in 2023. Recently, some FOMC participants have clamoured for an earlier start to QE tapering in late-21 and hikes in the Fed Funds Rate could commence as early as mid-22.


Markets becoming less tempestuous.

  • Former Fed chairman Ben Bernanke said that the Fed “could in the next few meetings take a step down in the pace of bond purchases” when answering questions on the Fed’s exit strategy for QE during his testimony to the US Congress on 22 May 13. Those fateful words triggered “Taper Tantrum”, which caused widespread trepidation and capital outflows from emerging countries, especially the Fragile Five comprising Brazil, India, Indonesia, South Africa and Turkey.
  • The FTSE ST All-share REITs Index corrected 20.2% over the next three months. Back then, the Fed did not have a clear roadmap on an exit strategy for QE.


Practice makes perfect.

  • Markets have reacted with a whimper since the Fed started “talking about talking about” tapering bond purchases in Jun 21.
    1. Investors are attuned to potential tightening. Financial markets have already reacted with higher government bond yields in 1H21 in response to the step-up in fiscal spending by the Biden Administration and signs of inflationary pressure. Back in Dec 20, Fed Chairman Jerome Powell had promised to give guidance well in advance of any decision for a QE taper.
    2. Emerging markets are less vulnerable. Emerging markets have reduced the size of their current account deficits and reliance on foreign currency debts. Capital inflows to emerging markets are much smaller nowadays compared to the heady years prior to the Taper Tantrum in 2013. Thus, a reversal to capital outflow would be less damaging for emerging markets.
  • Well synchronised. The upcoming QE taper and hikes in Fed Funds Rate are expected to coincide with re-opening and normalisation of economic activities.

Maintain OVERWEIGHT on S-REIT sector.






Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-08-27
SGX Stock Analyst Report BUY MAINTAIN BUY 1.020 SAME 1.020
BUY MAINTAIN BUY 3.830 SAME 3.830
BUY MAINTAIN BUY 1.790 SAME 1.790
BUY MAINTAIN BUY 3.630 SAME 3.630
BUY MAINTAIN BUY 3.060 SAME 3.060



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