REITs could drop 10% in 2015, says Nomura

If the government bond yield rises above 2.5%.

REITs are favored assets for many investors, but Nomura warns that SREITs could slip by 10% in 2015 if the Singapore government bond yield rises above 2.5%.

Nomura’s anti-consensus report stated that Singapore government bond yields are currently at their lowest since June 2013, and that there is a possibility of bond yields rising above 2.5% by the end of 2015.

“Unlike at the start of 2014, we believe there is widespread optimism amongst investors on yield products such as S-REITs, not unlike what we saw at the beginning of 2013. One of the indications is that, adjusting for core inflation, the US real 10Y yield is now only about 0.2% while the SG real 10Y yield is about 0.4%, implying a spread of just about -0.2pp (US to SG),” stated Nomura.

The report noted that since 2005, there had been three other occasions when the spread between the US real 10-year and Singapore real 10-year yield was within the range of -0.5 to 0pp.

“Market complacency in yields, like what we see at the moment, has historically laid the foundation for subsequent correction in S-REITs’ unit prices,” the report stated