Tailwinds ahead for defensive REITs as rate hike fears vanish

Yield plays are back in vogue.

Real estate investment trusts (REITs) will enjoy heightened investor interest amid the lower probability of a Fed rate hike, according to a report by OCBC.

OCBC noted that the uncertainty over the global economic outlook caused by a Brexit has raised questions over the path of the federal funds rate. Britain's decision to leave the EU means the world is likely entering a prolonged period of accommodative interest rates.

“We are upgrading our rating on the S-REITs sector from neutral to overweight, although we are cognisant of the headwinds that may pose operational challenges in the near-term,” OCBC said.

The report noted that the FTSE ST REIT index is currently trading at an undemanding valuation, at approximately 473 bps against the Singapore Government 10-year bond yield.

"Given the continued vagaries in the macroeconomic and geopolitical landscape, we see a structural shift towards a prolonged period of accommodative interest rates and believe that defensive yield plays are likely to enjoy significant tailwinds ahead," said the report.