S-REITs under pressure from bond yield hikes

Bond yields spiked over 100 bps.

Despite reporting a firm set of financial performance in 2Q13 (growing top line and stable interest costs), S-REITs share prices continue to remain under pressure. According to DBS Vickers Securiies, the weakness in share prices appears to derive from fund outflows and heightened required returns rather than weakening fundamentals.

Here's more from DBS:

S-REITs stock prices remain under pressure from further hikes in government bonds. Our Jun’13 report (As the dustsettles, value emerges) that called for value hunting within the S-REITs has met with little success. While we were right in our observation that S-REITs earnings will continue to show resilience and exhibit further growth ability, we have, however, over the past 2 months seen further pressure on S-REIT’s stock prices, with the FSTREI falling by a further 4%.

One of the main reasons for the weakness in share price can be attributable to outflows from the S-REITs, due to expectations of further increases in government long bond yields, which had spiked >100 bps of a possible tapering down of QE3, impacting required returns for the S-REITs.

We believe that if the yield curve were to hold/rise from current levels, this could potentially affect opportunity cost for holding on to yield stocks like the S-REITs and result in higher borrowing costs when SREITs refinance their debt.

Further long bond yield hike, forecasts by DBS Group interest rate strategist. DBS Group’s interest rate strategist has, over the course of the past 2 months, further hiked his expectation for the 10-year US treasury yields to increase by another 115 bps over the next 4 quarters to 4.0% by middle of 2014. Government bonds in Asia are also expected to see increases of between of up to 90 bps by 2Q14.

We note that Singapore long bonds are also expected to see yields hike by a further 30 bps till 2Q14 to 2.9% from current levels.