Margin calls for S-REITs slim as large-cap demand persists

Investors have been worried as some of these holdings may be leveraged.

S-REIT investors need not to worry about the possibility of facing margin calls as large-cap stocks are finding greater demand despite the lower absolute yield, according to a DBS Group Research report. Average leverage ratios have also been conservative.

Investors, especially those having a larger concentration of non-institutional holdings, have been anxious on whether they could be facing margin calls. As some of these holdings may be leveraged, the current market sell-off might spark a margin call and cause a steep drop in prices when these investors liquidate their holdings.

Worried investors may have been zeroing in on smaller-cap S-REITs and possibly EUR/USD-based S-REITs, the report noted.

The report also found that most industrial REITS have only less than 1% of their portfolio revenues exposed to oil & gas firms, whilst office S-REITs’ portfolios are exposed to the sector by 4% to 8%.

Also read: S-REITs to generate yields despite economic weakness: analyst

DBS believes that the risk of a prolonged oil war may tighten profitability and cash flows for these firms in the future. “Whilst we do not anticipate mass weakness across the oil & gas sector, the exposure is noteworthy,” analysts Derek Tan and Rachel Tan said.

The panic over the fall in oil prices further clouded an already volatile outlook for S-REITs. Whilst the 50-bp FED rate cut brought a short-term respite to the sector, with FED funds rate at 1% to 1.25%, there is little room left to move down if the economy weaken further.

However, S-REITs’ yield spreads are expected to remain wide, which would keep incremental flows into the sector and valuations stable at current levels.