Prolonged record-low interest rate cycle has driven investors to high yield stocks, REITs and property in the last few years. Even now, bond yields and interest rates seems likely to remain at low levels for longer than expected given the shaky state of the global economy. We believe that REITs are well placed to benefit from this economic environment and will continue to outperform other asset classes in the medium term
Low rates will continue to drive the chase for yield
REITs are favored asset classes in low or negative interest rate environment. Investors are hungry for yield. Large sovereign investors, for example the Japan Government Pension Investment Fund, is finding it hard to generate positive returns in the current low yielding environment. REITs are able to provide relatively better yielding returns and should see more interest from institutional investors, especially sovereign funds based in countries running at negative interest rates. We expect more capital will be deploy into REITs which are still generating relatively good returns, particularly the APAC REIT markets of Singapore, Hong Kong and Australia.
REITs will benefit from a flight to defensiveness
Despite the general view that the Feds will gradually raise rates from December 2016, we think that REITs will benefit from a flight to defensiveness theme. With a slew of key global political and economic events dominating the headlines such as the US presidential election, the Italian referendum, and the impending Feds rate hike in December 2016, we expect volatility and apprehension to permeate the global markets. The stability of dividends provided by REITs provides the certainty in such an unstable and volatile environment.
Valuations are still attractive, particularly Singapore REITs
Singapore is the highest yielding REIT market among developed countries, yielding over 6% per annum on average. Singapore remains to be a strong investment destination for global investors given the clear rule of law and open business environment. There are more than 40 REITs and property trusts listed in Singapore, across a wide range of property sectors with single-country or regional focus. The recent launch of an APAC REIT ETF should help create more interest for REIT investing. We believe Singapore REITs remains attractively valued compare to other global REIT markets and is a good alternative investment in addition to bonds and stocks.
Biggest risk to our view is a faster than expected interest rate hiking cycle
With ample liquidity in the financial system, the weight of capital will continue to further compress REIT yields. However, a more hawkish Feds could rattle the market and affect the performance of REITs. We believe that the risk of that happening is low, as we view that the Feds will hike rates in a gradual and measured manner, and therefore REITs should be able to maintain its stability in their trading price and distributions, notwithstanding temporal knee-jerk reactions when the hikes happens.