Chart of the Day: S-REITs outpaced STI by 1.1ppt despite negative returns

They could provide "defensive shelter" amidst uncertainties, analysts say.

This chart from OCBC Investment Research shows that year-to-date, Singapore REITs continued to outpace the Straits Times Index (STI) by 1.1ppt despite negative returns. The brokerage said the REITs provide a "defensive shelter amidst macroeconomic uncertainties."

OIR analyst Andy Wong Teck Ching noted that the forward yield spread still remains relatively tight at 363 bps, or 1.1 standard deviations below the 5-year mean (408 bps).

"We had been largely cautious on the S-REITs sector since the start of the year, particularly during times when the forward distribution yield spread against the Singapore government 10-year bond yield had compressed to two standard deviations below its 5-year mean. This happened during late January and early May this year," he said.

However, OIR is less negative than before, as they think the ongoing macroeconomic uncertainties emanating from the US-China trade friction and concerns over economic contagion from Turkey have dampened investors’ sentiment and resulted in a flight to good quality defensive assets.

"Given the aforementioned factors, we believe S-REITs, with its prudent capital management and proactive leasing approach, can warrant a strategic position in investors’ portfolio, but in a selective manner," the analyst said. 

The average fair values, based on Bloomberg consensus estimates, comes in at ~9.1% above the closing prices (expected total returns +15.6% including projected distribution yields). "From a tactical positioning, we would prefer S-REITs to Singapore developers at this juncture," Wong concluded.