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Quick takes on the Fed’s 50bps cut from our REIT ETF Issuers
The US Federal Reserve cut the overnight borrowing rate by 50 basis points to 4.75%-5%. REIT ETF issuers expect this to benefit S-REITs, with potential for further rally.
The US Federal Reserve cut the overnight borrowing rate by 50 basis points to 4.75% to 5%. REIT ETF Issuers believe this will benefit S-REITs, with potential for further rally.
Key Takeaways
- The US Federal Reserve cut the overnight borrowing rate by 50 basis points to 4.75%-5%, with further cuts planned, benefiting S-REITs through lower borrowing costs and potential for further rally.
- REIT ETF issuers highlight that lower interest rates will boost S-REITs’ profits and distributable income, enabling more accretive acquisitions and enhancing growth.
- The favorable rate environment and easing inflation support the Singaporean economy and S-REITs, with balanced supply and demand in various REIT sectors and resilience in retail and hotel REITs.
Following recent softening in jobs data and inflation, the US Federal Reserve made its first rate cut in four years, lowering the overnight borrowing rate by 50 basis points to a range of 4.75% to 5%.
The Fed plans further cuts – another 50 basis points this year, a full percentage point in 2025, and half a point in 2026. However, it has increased its long-term rate projection to 2.9%, up from 2.8%, and much higher than December 2023’s 2.5%.
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Here’s what our REIT ETF issuers have to say about the rate cut and how it’ll impact the REITs sector:
Bruce Zhang from CSOP Asset Management explained that with the US Fed’s recent 50-basis point cut and anticipated further cuts, yield-sensitive securities like S-REITs are expected to benefit. The recovery in manufacturing and trade services, easing inflation, and reduced cost pressures are bolstering the Singaporean economy and S-REITs. Balanced supply and demand in industrial, office, and retail REITs support rental reversions, while retail and hotel REITs show resilience. With dissipating headwinds and attractive yields, S-REITs have potential for further rally.
Ong Xun Xiang from Lion Global Investors explained that with the US Fed starting the rate cut cycle in September, S-REITs are expected to benefit from lower borrowing costs, boosting their profits and distributable income. Additionally, lower interest rates will enable high-quality S-REITs to secure cheaper debt for more accretive acquisitions, further enhancing their growth.
Phillip Capital’s Deputy Chief CIO, Tan Teck Leng, explained that although the US Fed’s interest rate cut took longer than expected, the cycle has begun strongly. REITs, being rate-sensitive investments, are poised to benefit from lower borrowing costs, which will enhance their profits over time. Additionally, the comparative yield attractiveness of REITs will become more apparent compared to government bonds and fixed deposits, whose rates are expected to drop, sustaining market interest.
Straits Investment Management’s CEO, Manish Bhargava, noted that the US Fed’s rate cut in September and potential future cuts create a favorable environment for REITs, with distribution per unit (DPU) growth expected to recover by 2025. He anticipates a cumulative Fed rate cut of around 200 basis points by the end of 2025, driven by an expanding yield spread, potential earnings growth from lower financing costs, and strengthened balance sheets supported by stabilizing asset values and ongoing deleveraging efforts, maintaining a positive outlook for REITs.
UOB Asset Management’s Head of Sustainability Office, Victor Wong, highlighted that the recent rally indicates a potential sector valuation re-rating and an inflection point for the REITs market. With cheaper financing costs anticipated, property fundamentals, rental income, and earnings growth are expected to improve significantly. These conditions are particularly favorable for sustainability-focused real estate projects, providing a positive outlook for the green REITs market, especially in Australia and Singapore.
REIT ETFs in Singapore reach historic AUM highs with growing investor appetite
Investing in ETFs has become increasingly popular as it provides instant diversification into a basket of securities, transparency and tradability, as well as lower fees and transaction costs.
The ETF industry in Asia-Pacific ex-Japan saw AUM grow 35% year-on-year to over US$780 trillion by end 2023. In Singapore, retail and institutional clients’ ETF AUM has also almost doubled in the past four years.
Since the debut of REIT ETFs in 2016, REIT ETFs have become a key building block for investors in Singapore. Their combined AUM reached a new record of S$1 billion as at 30 September 2024.
Across the 5 REIT ETFs, retail investors, including those invested using their SRS and CPF monies, accounted for 62% while institutions accounted for 26%, and digital platforms that include regular shares savings and robo advisors accounted for 12%.
REIT ETFs’ daily turnover over the past 3Q24 has reached S$4.2 million, which is up almost 45% from 1H24, and up 173% from 2023.
Inflows to the two pure S-REIT ETFs – CSOP iEdge S-REIT Leaders Index ETF and Lion-Phillip S-REIT ETF – in the first 3 quarters of 2024 has crossed S$145 million, highest since 2021 when S$168 million was recorded that year.
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