US yield curve continues to steepen, making record 2 year highs. We have been calling for investors to SELL Singapore REITS since the end of May during which time they have fallen an average of 11% (20% peak to trough). Despite this sharp correction we re-iterated our view throughout July (when the REITs were trending upwards) and we again urge investors not to get fooled by the sharpness of the recent correction; we think there is much further for these names to fall (a point underlined by a recent negative initiation on the sector by another broker yesterday).
- US rates (and therefore Singapore swap rates) will continue to trend upwards
- Singapore REITs are some of the most exposed investments to rising US interest rate potential
- Despite recent share price moves, history suggests the move has been less than half of what is warranted, even should rates remain where they are currently.
- During 2008 each 1% move in the Singapore fixed for floating swap rate caused a 40% fall in the Singapore REIT valuations
- The Singapore REITs have enjoyed an unprecedented period of extended low rates and have significant Debt falling due for rollover (average 43% within 19 months).
- Although gearing was at a marginally higher level for some names in 2008, in general gearing in the Singapore REITs is similar to 2008 and some our preferred SELL candidates have gearing levels nearly double their 2008 levels.
- Valuations started in 2008 at levels similar to where they are currently (even after the recent weakness) (PE, PB and EV/Sales); although one of our favourite Shorts (KREIT SP) started with a PB half of its current level.
The above implies on a simplistic basis that;
- Should rates remain at current levels (if history is a guide) share prices should have already moved TWICE as far as they have already (average fall of 17% should be more like a 40% correction).
- Even having said this; we believe rates will go up considerably further presenting even more downside.
- Furthermore; rents continue to be pressured for many of these names presenting additional concerns.
Valuations are far from reflecting the global yield environment;
- KREIT is currently trading on 0.93X Book Vs a trough 2008 multiple of 0.24X
- Most other Singapore REITs show the same current valuation levels Vs their history as Capita Commercial trust (below);
Singapore REITs are far from trough valuations despite the outlook for rates.
The last similar US yields steepening was in 2008.
2008 US Curve steepening due to “zero interest rate policy”
Singapore REITs fell nearly 70% during this time (vs current peak to trough of 20%), falling to trade at around 0.2X PB vs current 0.9X
Saw Singapore Swap rate soar and Basket of Singapore REITs crash nearly 70%
Recently, the sensitivity the REITs have to the steepening trends of the US yield curve looks to have re-established.
Renewed US Yield curve steepening has seen the inverse relationship to the REITS re-establish.
Our top picks to SELL remain;
MINT Mapletree Industrial Trust - Highly geared with 82% of Debt rolling in 19 months. Mostly bank loans (1.61% indicative rate 91% swap hedged to fix). Expensive Book value.
KREIT Keppel Reit – Highly geared and high sensitivity to interest rate moves with 28% of Debt rolling in 19 months. Weighted ave current cost 2.2%. 22% of Debt fixed (1.9-3%), 37% covered by swaps with rest floating (0.75-1.9%+SOR).
SUN Suntec Reit – Highly geared and high sensitivity to interest rate moves with 39% of Debt rolling in 19 months. Effective total rate 3-3.65%
CRCT Capita Retail – small but high gearing with 100% of debt rolling off within 19 months. Current 2% effective rate, mainly floating but 65% swaps pay fixed receive variable. Mainly SHIBOR rates.
In general Singapore REITS although less expensive on most metrics they are significantly more geared (47% Net Debt/ Equity Vs 29% for HK) and have a riskier Debt profile with on average 42% of their debt becoming due in the next 19 months (Vs 30% in HK).
