Favourable S-REITs Yield Spreads Against 10-Year SGS
Led by deteriorating fundamentals and the one-month lock down in Singapore, S-REITs saw another bout of sell-off on 03 April 2020. The recent market movement indicates that investors are bracing for further potential dividend cuts.
On average, S-REITs have already declined by 39% from the peak as of 03 April 2020. At this level, the trailing- 12-month yield stands at 6.60%. Valuation-wise, most S-REITs are now trading at around 0.75 times price-to-book value (P/B) compared to 1.17 times pre-crisis period. Comparing pre-crisis and post-crisis book values, the market has already priced-in about 35% cut in assets valuations of S-REITs.
To put things into perspective, S-REITs distributions per unit (“DPU”) was down 20% and were trading at around 0.44 times P/B during the lowest point of the Global Financial Crisis (“GFC”) in 2008. The lower P/B multiple was a result of wider sell-off, owing to higher level of borrowings in the balance sheets at higher interest costs for S-REITs during that time. At the bottom of the market, S-REITs dividend yields averaged about 5.75% while the Singapore 10-year government bond was yielding 2.25%.
Assuming current S-REITs’ prices continue to trade down to GFC’s level of 0.44 times P/B (representing another 41.3% fall), the historic trailing- 12-month yield of 6.60% would increase correspondingly to about 9.3%. However, such a scenario assumes no further deductions to DPU and may not be reflective of the reality.
On a forward-looking basis, S-REITs are likely to taper down DPU in adjustment to this challenging landscape. At current valuations, market seems to have priced in a 20 percent deduction in future DPU for S-REITs, which would yield 6.65%.
In our worst case scenario, we assume a 50% cut in DPU and S-REITs would yield 4.16% compared to the Singapore 10-year government bond yield of 1.04%. The Singapore 10-year government bond yield has come down from 1.75% in January.
Justifiably, the yield spreads of S-REITs against the Singapore 10-year government bond for base case (20% DPU cut) and worst case (50% DPU cut) now is 5.63% and 3.14% respectively. Compared to the yield spread of 3.5% during the GFC, the yield spreads are much more attractive. Inherently, this also means that S-REITs are currently offering rather compelling value to any long-term investor.
Source: Phillip Capital Management; as of 03 April 2020
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