A question many investors have often finance industry professionals like ourselves, is this the time to let go of their real estate investment trust (Reit) stocks given that the US Federal Reserve is expected to normalise interest rates soon, and reduce their quantitative easing (QE) measures.

In this article, we shall examine this hotly asked question by retail investors. We’ll start off by looking at FTSE ST Real Estate Investment Trust (REIT) Index. Here is the chart diagram:

Source: Phillip POEMS Trading Platform (One-year daily chart for FTSE ST REIT Index, July 25, 2017)

Looking at the chart above, we noted that the FTSE ST REIT Index chart is climbing higher, signalling possible discounting of the impact of higher interest rates. The average directional index (ADX) below is showing positive directional indicators (DIs) outpacing the negative Dis, and showing positive momentum.

Likewise, the recently debuted NikkoAM – Straits Trading Corporation Asia REIT Index exchange traded fund (ETF) is making new highs since its maiden debut in April. The issue was priced initially at $1.00. The latest price as of market close on July 25, 2017 is $1.094 or a 9.4 per cent during the period from April 2017.

Source: Phillip POEMS trading platform (One-year daily chart of Nikko AM – STC Asia Reit Index ETF, July 25, 2017)

We noted that even though the ETF trades on relatively low volumes for a large part of the period from April 2017 till date, the index ETF did experience a spike in trading volumes when the price hit $1.103 end of June. It declined briefly, and has since staged a turnaround since mid-July 2017. We noted that the down shift in the index in late June coincided with the aftermath of the US Federal Reserve Meeting where monetary policy makers decided to hike the interest rate to minimise any excessive risk-taking. However, the index started to rise as Fed chairperson Janet Yellen started to talk down on further interest rate hikes, noting the benign US inflation rates. Instead, most of the focus is the unwinding of the US$4.5 trillion balance debt by end of the year which Chairperson Yellen noted its importance on several occasions.  

The Nikko AM-STC Asia REIT Index ETF physically replicates the performance of the FTSE EPRA/NAREIT Asia ex-Japan Net Total Return REIT Index. According to data from Phillip Securities, and Nikko Asset Management, since the debut of the index, total assets under management (AUM) rose from S$56.3 million to $72.6 million as of end June 2017.

The Nikko AM-STC Asia REIT Index ETF has a substantial exposure to Singapore Reits (S-Reits), followed by other Reits in the Asia-Pacific region including Malaysia, and Hong Kong, among others.

Likewise, for the Phillip Asia-Pacific (AP) Dividend Reit ETF, we noted that the index has also staged an upturn after a heavy sell down for about a month from mid-June to around mid-July 2017.

Source: Phillip POEMS trading platform (One-year daily chart of the Phillip SGX APAC Dividend Leaders ETF, July 26, 2017)

We also noted that the chart is staging an upturn, albeit a relatively low trading volume. Although the trend is heading up along with the 50-day and 100-day moving averages (MA) crossovers, it is challenging to discern any significance without seeing a corresponding rise in the trading volume.

A brief introduction of the Phillip SGX APAC Dividend Leaders ETF. According to the Phillip Securities marketing materials, this exchange traded fund product seeks to obtain a broad exposure to quality real estate investment trust assets in the region. The ETF utilises a smart beta strategy which ranks and weight the underlying Reits according to total dividends paid in the preceding 12 months, with the aim of enhancing returns above that of the traditional market cap-weighted ETFs. The ETF comes in both Singapore Dollars and US Dollars.

Phillip Capital Management came out with a research paper noting on the impact of rising interest rates on Reit returns. They noted that due to the nature of S-Reits being a dividend-yielding focused asset, the main focus is not on capital appreciation, but on the sustainability and continuity of distributions. They also noted that based on historical track record, Reits have often bounced back following an interest rate hike. A chart extract from the research note is shown here:

Source: Phillip Capital Management (July 26, 2017)

Readers might note that following the taper tantrum in May 2013, the S&P Asia Pacific Reit returns often bounce back. They noted that since 2011, they saw an inverse relationship between US 10-year Treasury yield and APAC REIT Total returns. They noted that in 2013 when the US Federal Reserve (Fed) first raised rates, they saw a rise in the 10-year Treasury yield. Although the APAC Reits were impacted when as a group, they lost almost 18 per cent of value in just a month. However, it bounced back within six months and went on to gain almost 50 per cent from its lowest point over the next few years.

Similarly, in 2016, after an actual short-term rate hike, the APAC Reits fell by around 14 per cent. However, after four months, the trends reversed, and the APAC Reits rose by an average of 9 per cent in six months.

Should investors be express deep concerns on the impact of interest rates of Reit returns
In summary, we think that based on the charts and research, most of the Reits, including S-Reits have generally bounced back from several knee-jerk reactions by investors towards interest rate hike announcements. However, we do caution that most of the data is based on historical trends, and there is no certainty on whether future events will show similar trends.

However, we feel that in such down shift situations, investors are likely to be presented with opportunities to look for good quality S-Reits with low leverage ratios, strong fundamentals, and experienced management teams, among other attributes before investing in such Reit names. It is also highly important that investors do their thorough research and due diligence before putting on the S-Reits in their individual portfolios.

Note: You would like Tay Hock Meng, a licensed financial services consultant with Phillip Securities Pte Ltd to contact you for such marketing, advertising and promotional purposes via the voice call, SMS, and Fax, overriding any DNC registration.

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