S-REITs succumb to selling pressures

FSTREI index has been declining 4.3% since October 24.

The share prices of S-REITs have come under selling pressure over the past two weeks, with the FTSE ST REIT Index (FSTREI) declining 4.3% since October 24, OCBC Investment Research noted. While this is in-line with the broad market weakness, as STI is down 2.0% during the same period given uncertainties over the U.S. presidential election, the brokerage firm believes the underperformance can also be attributed to increasing market jitters over the likelihood of a Fed rate hike in December this year.

"Based on the Fed funds futures rate, the probability of a rate hike during the Dec FOMC meeting has risen from 70.9% (as at 24 Oct 2016) to 80.0%. The Nov FOMC meeting statement released highlightedthat while economic activity has improved since 1H16, the Committee has decided to await some further evidence of continued progress toward its employment and inflation objectives," OCBC explained.

More so, it stated that a rate hike in December is on the cards, which may result in continued volatility in the share prices of S-REITs.

"However, in our view, investors should position themselves by taking advantage of weakness in the market to accumulate selective REITs, as the interest rate environment is likely to stay accommodative in the year ahead," OCBC stressed.

The FSTREI is currently trading at a yield spread of 472 bps against the Singapore Government 10- year bond yield, which is half a standard deviation above the 5-year mean.